UNIT-I

BASICS OF MANAGEMENT

1.1. Introduction to Management

The managers achieve organizational objectives by getting work from others and not performing in the
tasks themselves.

Management is an art and science of getting work done through people. It is the process of
giving direction and controlling the various activities of the people to achieve the objectives of an
organization.

1.2. Definition of Management

There are numerous definitions of management. Different experts have defined different points
of view.
According to Mary Parker Follett, “Management is the art of getting
things done through people”

Harold Koontz defined as, “Management is the art of getting things

done through and with people in formally organized groups. It is the art
of creating an environment in which people can perform and individuals
could cooperate towards attaining of group goals”.

In view of Joseph Massie, “Management is defined as the process by

which a cooperative group directs actions towards common goals”.

George.R.Terry’s point of view, “Management is a distinct process,

consisting of planning, organizing, actuating and controlling, performed
to determine and accomplish stated goals by the use of human beings
and other resources”.
According to this definition, management is a process a systematic way of doing things. The four
management functions included in this process are planning, organizing, directing and controlling.
Planning refers manager’s think of their actions in advance. Their actions are
usually based on some method, plan or logic, rather than on a hunch.

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 Organizing refers manager’s coordinate the human and material resources of the
organization.
Actuating refers managers motivate and direct subordinates
Controlling refers attempts to ensure that there is no deviation from the plan or
norms.

This definition also indicates that managers use people and other resources such as finance, equipment’s
etc… in attaining their goals.
Finally, the definition states that the management involves the act of achieving the organization’s
objectives. These objectives will, of course, vary with each organization.

The following chart clearly presents this definition of management.

Basic Resources (6M) Fundamental Functions Desired Objectives

Planning Organizing
Men
Material
Machine
Methods Stated
Money Goals
Market Directing Controlling

Input Process of Management Output (End Result)

1.3. Nature/Characteristics of Management

Following are the nature and characteristics of Management
1. Management is an activity
It is a process of organized activity concerned with efficient utilization of resources of
production like men, material, machine, money etc…
2. Management is a purposeful activity
It is concerned with the achievement of an objective through its functions. Objectives may be
explicit on implicit.

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3. Management concerned with the efforts of a group
Management is concerned with management of people and not the direction of things. It
motivates the workers to contribute their best.
4. Management is getting things done
A manager does not do any operating work himself but gets it done through others.
5. Management applies economic principles
Management is the art of applying the economic principles that underlie a control of men &
materials in the enterprise under consideration.
6. Management involves decision-making
It is a decision-making process and the decisions are involved in all the functions of
management.
7. Management coordinates all activities and resources
It is concerned with coordination of all activities and resources to attain the specific objectives.
8. Management is a universal activity
The techniques and tools of management are universally applicable.
9. Management is an integrating process
It integrates the men, materials and machines for achieving stated objectives.
10. Management is concerned with Direction and Control
It is concerned with direction and control of human efforts to attain the specific
objectives.
11. Management is Intangible
It is abstract and cannot be seen. It is evidenced by the quality of organization and through its
results.
12. Management is both science and an Art
Management has certain universally applicable principles, laws etc…. Hence, it is a science. It is
also an art, because it is concerned with application of knowledge for the solution of organizational
problems.
13. Management is a profession
It is becoming a profession because there is established principles of management which being
applied in practice.
14. Management is an inter- disciplinary approach
Management as a body of discipline takes the help or other social science like psychology,
sociology, engineering, economics, Mathematics etc…

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15. Management is dynamic and not static
Management adopts itself to the social changes and also introduces innovation in methodology.

1.4. Scope of Management

The scope of management is very wide. The functional areas of management may be classified
into the following categories.
 Production Management
 Marketing Management
 Financial Management
 Personnel Management

i) Production Management
Production function so as to produces the right goods in right quantity at the right time and at
the right cost. It consists of the following activities.
 Designing the product
 Location & Layout of plant and building
 Operations of purchase & storage of materials
 Planning & control of factory operations
 Repairs & maintenance
 Inventory control and quality control
 Research and development etc…

ii) Marketing Management

It refers to the identification of consumer’s needs and supplying them the goods and services,
which can satisfy those, wants. The activities are as follows:
 Marketing Research to determine the needs and expectations of consumers
 Planning and developing suitable products
 Setting appropriate prices
 Selecting the right channels of distribution
 Promotional activities like advertising and salesmanship to communicate with
the customers.

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iii) Financial Management
Financial management seeks to ensure the right amount and type of funds to business at the
right time and at reasonable cost. The activities are as follows:
 Estimate the volume of funds requires for long term and short term needs of
business
 Selecting the appropriate sources of funds
 Raising the required funds at the right time
 Ensuring proper utilization and allocation of raised funds
 Administration of earnings.
iv) Personnel Management
It involves planning, organizing, directing & controlling the procurement, development,
compensation, maintenance etc… of the human resources in an enterprise. It consists of the following
activities:
 Manpower planning
 Recruitment
 Selection
 Training & Development
 Performance Appraisal
 Compensation & promotion
 Employee services & benefits
 Maintaining personnel records etc…
1.5. Functions of Management
Different authors offering different names for the same functions of management
Henri Fayol identifies five functions of management viz, planning, organizing, commanding,
coordinating and controlling.
Koontz & O’Donnell, divides the management functions into planning, organizing, staffing,
directing and controlling.
Warren Haynes and Joseph Massie classifies management functions into decision-making,
planning, organizing, staffing, directing, controlling, and communicating.

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 Luther Gulick, states seven such functions under the catch word “POSDCORB”
Which stand for
P – Planning
O – Organizing
S – Staffing
D – Directing
Co – Coordinating
R – Reporting
B - Budgeting
As per managers are concerned, the following five functions are essential. They are Planning,
Organizing, Staffing, Directing, and Controlling. In addition to above five functions, the two functions
such as Innovations and representation are also necessary for managers

1.6. Management Process

There is enough disagreement among management writers on the classification of managerial
functions. Some classify these functions into four types, some into six or seven. The terminology is
also not always alike, different authors offering different names for the same functions of management.
For managerial purpose, the following five functions are very essential for managers. They are
planning, organizing, staffing, directing and controlling.

i) Planning
Planning is the function that determines in advance what should be done. It is looking ahead
and preparing for the future. It is a process of deciding the business objectives and charting out the
methods of attaining those objectives. In other words, it is the determination of what is to be done,
how and where it is to be done, who is to do it and how results are to be evaluated. This is done not
only for the organization as a whole but for every division or department or sub-unit of the organization.
It is a function, which is performed by managers at all levels, like top, middle and supervisory levels of
management. Plans made by top management of the organizations whole may cover periods as long as
five or ten years. Also, plans made by middle or first line managers, cover such shorter periods. Such
plans may be for the next days or weeks, or months, etc… for example, for a two-hour meeting to take
place in a week.

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 Following are the sub functions of planning: forecasting, Decision - making, strategic
formulation, policy-making, programming, scheduling, budgeting, problem solving, innovation and
research activities.

ii) Organizing
It refers to coordinate human resources with other resources such as material, machine,
money etc… Once managers have established objectives and developed plans to achieve them, they
must design and develop a human organization that will be able to carry out those plans successfully.
According to Allen, this organization refers to the “structure which results from identifying and
grouping work, defining and delegating responsibility and authority, and establishing relationships.”
According to Amitai Etzioni “An organization is a social unit or human grouping, deliberately
structured for the purpose of attaining specific goals”.

The process of organizing involves the followings:

 Identifying the activities necessary to achieve the objectives.
 Grouping activities into various departments
 Assigning duties or tasks to appropriate individuals
 Delegating necessary authority to individuals and fixing responsibilities for results.
 Defining authority and responsibility relationship among individuals.
Sub-functions of organizing functions are as follows: Functionalisation, divisionalisation,
departmentation, delegation, decentralization, activity analysis,task allocation.

iii) Staffing
Staffing may also be considered an important function involved in building the human
organization. In staffing, the manager attempts to find the right person for each job. Staffing fixes a
manager’s responsibility to recruit and to make certain that there is enough manpower available to
fill the various positions needed in the organization. Staffing involves the selection and training of
future managers and a suitable system of compensation. Staffing obviously cannot be done once and
for all, since people are continually leaving, getting fired, retiring and dying. Often too, the changes in
the organization create new positions, and these must be filled.
According to Koontz and O’Donnell, “The managerial function of staffing involves manning the
organizational structure through proper and effective selection, appraisal and development of personnel
to fill the roles designed into the structure”.

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 Staffing function has the following sub functions. They are manpower planning, recruitment,
selection, training & development, placement, compensation, promotion, appraisal etc…
iv) Directing
After plans have been made and the organization has been established and staffed, the next step
is to move towards its defined objectives. This function can be called by various names: ‘Leading’,
‘Directing’, ‘Motivating’, ‘Actuating’, and so on. But whatever the name used to identify it, in carrying
out this function the manager explains to his people what they have to do and helps them do it to the
best of their ability.
Directing thus involves three sub-functions. They are as follows
 Communication,
 Leadership and
 Motivation.
 Communication is the process of passing information and understanding from one
person to another.
 Leadership is the process by which a manager guides and influences the work of his
subordinates.
 Motivation means arousing desire in the minds of workers to give their best to the
enterprise. It is the act of stimulating or inspiring workers. If the workers of an enterprise are
properly motivated they will pull their weight effectively, give their loyalty to the enterprise, and
carry out their task effectively.
Two broad categories of motivation are financial and non-financial. Financial motivation takes the
form of salary, bonus, profit sharing, etc., while non-financial motivation takes the form of job security,
opportunity of advancement, recognition, praise, etc.
v) Controlling
The manager must ensure that everything occurs in conformity with the plans adopted, the
instructions issued and the principles established.
Three elements are involved in the controlling function.
 Establishing standards of performance.
 Measuring current performance and comparing it against the established standards.
 Taking action to correct any performance that does not meet those standards. In the
absence of sound control, there is no guarantee that the objectives, which have been set, will be
realized. The management may go on committing mistakes without knowing them. Control
compels events to conform to plans.
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 Controlling function has the following sub functions. They are
 Fixation of standards,
 Recording,
 Measurement,
 Reporting,
 Corrective action.
1.7. Levels of Management
In every company, there is a managerial hierarchy or chain of command, which consists of several
levels of authority. The number of management levels may differ from company to company. In a big
company the management levels may be classified into three categories viz.
 Top management
 Middle management
 Supervisory or Operating management
In a very large enterprise the middle management levels may be subdivided into upper middle
management and lower middle management
i) Top Management
Top management consists of the board of Directors and the chief executives. Chief executives may
be an individual, for example, Managing Director, General Manager etc… or a group of chairman
and functional executive Directors. Board of directors is accountable to the shareholders in the annual
general meetings of the company. The chief executive is concerned with the overall management of the
company’s operations. He maintains coordination among different departments/sections of the
company. He also keeps the organizations in harmony with its external environment.
Functions
 To analyse and interpret changes in the external environment of the company.
 To establish long term corporate plans (goals, policies & strategies) of the
company.
 To formulate and approve the master budget and departmental budgets
 To design board organization structure
 To appoint departmental heads and key executives
 To provide overall direction and leadership to the company
 To represent the company to the outside world
 To decide the distribution of profits

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ii) Middle Management
a) Intermediate Management
Intermediate / upper middle management comprises departmental or divisional heads. For
example, Marketing Manager, Production Manager, etc… It is also known as departmental or
functional Management. Each divisional or departmental heads are the overall incharge of their
respective division/department. He performs the usual managerial functions of planning, organizing,
staffing, directing, and controlling in relation to one department.
b) Lower middle Management
Lower middle management levels consist of sectional heads. For example, plant manager,
sales manager, branch manager etc… These executives serve as a link between intermediate or top
management and the operating management.
Functions of Middle Management
 To interpret and explain the plans and policies formulated by top management
 To monitor and control the operating performance.
 To train, motivate and develop supervisory personnel
 To lay down rules and regulations to be followed by supervisory personnel

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 Board of
Directors

Top
Management

Managing
Director

Intermediate
Management/Upper-
Marketing Production Finance Personnel
Manager Manager Manager Manager Middle Management

Lower-Middle
Branch Plant Chief Office Management
Managers Superintendent Account Manager

Operating
Management/
Sales officer Foremen or Accounts or Personnel
Supervisory
Supervisors finance officer officer Management

Rank and file

Salesmen Workers Clerks Clerks work force

Levels of Management
iii) Supervisory/Operating Management
This is the lowest or first level of management in an organization. It consists of supervisors,
foremen, sales officers, accounts officer, purchase officer etc… They maintain close contacts with the
ranks and white colour workers and supervise day – to – day operations. They serve as the channel of
communication between management and the workforce. They are concerned with the mechanics of
jobs.
Functions
 To plan day – to – day production within goals laid down by higher officials
 To assign jobs to workers and to make arrangements for their training and
development

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  To issue orders and instructions
 To supervise and control workers operations and to maintain personal contact
with them
 To arrange materials and tools and to maintain machinery
 To advise and assist workers by explaining work procedures, solving their
problems
 To maintain discipline and good human relations among workers
To report feedback information and workers problems to the higher authorities.

1.8. Skills of Managers

By managerial skills, we mean the skills or qualities desired in managers, the possession of
which would enable to act as practicing managers. Following three broad types of managerial skills are
very essential for managers.
 Technical skills
 Human skill or Behavioral skills
 Conceptual skills
i) Technical Skills
Technical skills refer to the skill and knowledge, which is required for performing an
operational activity, in the best manner. i.e., technical skill might be termed as technical expertise.
Technical skill is an imperative skill for managers at the lower level of management; because it
is actually these people who guide and supervise work operators under their subordination. For
example, mechanics work with tools, and their supervisors should have the ability to teach them how to
use these tools. Similarly, the teacher, who, before, imparting teaching to pupils in a particular
discipline, must be an expert in that discipline.
Technical skill is also required in managers at upper and middle levels of management.
Managers at these levels do the fundamental planning for operational work leaving the detailed day
– to – day operational plans to be made by the supervisory level.
ii) Human Skills
The basic responsibility of every manager is to get things done by others. In this process,
managers need human skills. Human skills refer to those abilities, which are needed by the manager to
effectively deal with subordinates. To manage, he has to understand their needs, interests and values.
He interacts with them, guides, directs, leads, and motivates them. In this regard, he is expected to

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know general tendencies of human behaviour and factors influencing it. By using human skills, he may
establish good rapport, warmth relationships and conductive interpersonal relations with his
subordinates. It is needed for providing dynamic and effective leadership and building a team spirit
among employees.
Since, managers at all levels in the enterprise are supposed to deal with human beings in a
subordinate position; all managers from the top to the lowest levels in the management hierarchy
equally need human skill.
iii) Conceptual skills
Conceptual skill comprise the ability to see the whole organization and the inter relationships
between its parts. These skills refer to the ability to visualize the entire picture or to consider a
situation in its totality. Such skills help the manager to conceptualize the environment, to analyse the
forces working in a situation and to take a broad and farsighted view of the organization. Conceptual
skills also include the competence to understand a problem in all its aspects to use original thinking in
solving the problem. Such competence is necessary for rational decision-making.
Conceptual skill is imperative for top management level, necessary for the middle
management and desirable for the lower level of management.
Thus, Technical skills deal with jobs, Human skill with persons and Conceptual skills with ideas.
These types of skills are interrelated. The relative importance of these skills may differ at various levels
in the organization hierarchy. Following figure is clearly explained the importance of skills required at
various levels of management.

Top
Management

Conceptual Skill

Human Skill
Middle
Management

Operating Technical Skill

Management

MANAGERIAL SKILLS AT VARAIOUS LEVELS OF MANAGEMENT

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1.9. Role of Managers
The job of a modern manager is very complex and multi-dimensional. Mintzberg has identified ten
roles of a manager which are grouped into three categories viz.,
Interpersonal Roles
 Figure head
 Leader
 Liaison
Informational Roles
 Monitor
 Disseminator
 Spokesman
Decisional Roles
 Entrepreneur
 Disturbance handler
 Resource allocator
 Negotiator
1. Figure head
In this role a manager performs symbolic duties required by the status of his office. Making
speeches, bestowing honours, welcoming official visitors, distributing gifts to retiring employees are
examples of such ceremonial and social duties.

2. Leader
This role defines the manager relationship with his own subordinates. The manager sets an
example, legitimizes the power of subordinates and brings their needs in accord with those of his
organization.
3. Liaison
It describes a manager’s relationship with the outsiders. A manager maintain mutually
beneficial relation with other organizations, governments, industry groups, etc…
4. Monitor
It implies seeking and receiving information about his organization and external events. An
example is picking up rumors about his organization.

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5. Disseminator
It involves transmitting information and judgments to the members of the organization. The
information relates to internal operations and the external environment. A manager calling a staff
meeting after a business trip is an example of such a role.
6. Spokesman
In this role, a manager speaks for his organization. He lobbies and defends his enterprise. A
manager addressing the trade union is an example.
7. Entrepreneur
It involves initiating change or acting as a change agent. For example, a manager decides to
launch a feasibility study for setting up a new plant.
8. Disturbance Handler
This refers to taking charge when the organization faces a problem or crisis. For example, a
strike, a feud between subordinates loss of an important customer. A manager handles conflicts,
complaints and competitive actions.
9. Resource allocator
In this role a manager approves budgets and schedules, sets priorities and distributes
resources.
10. Negotiator
As a negotiator, a manager bargain with suppliers, dealers, trade union, agents, etc…For
example, the manager may negotiate with the union leaders regarding strike issues.

1.10. Evolution of Management Thought

To get proper and balanced perspective of theory and practice of management all developments
taking place since the beginning of the 20th century may be placed under three main categories. They are
as follows:
Classical or traditional Management approach
 Behavioral or neo-classical approach
 Modern approach to management

1.10.1. Classical or traditional Management approach

The classical approach to management is one of the oldest and most popular, known as the
traditional or universal process. It is based on the assumption that the objective of an organization may
vary from one to another but the management of all organizations requires similar management process.
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It has its roots in the basic concepts of division of labour and specialization. This approach consists
mainly of scientific management developed by F.W.Taylor, administrative theory of management by
Henry Fayol and bureaucratic organization by Max Weber.

1.10.1.1. Theory of Scientific Management

Though scientific management theory is based on the contributions of many scholars and
practitioners like Fredrick Winslow Taylor, Henry Gantt, Frank Gilbrith, Emerson and Carl Berth, etc.
But F.W.Taylor has given a concrete shape to the theory of scientific management.
Tailor’s Theory of Scientific Management
F.W.Taylor (1856 – 1915) is known as the “father of Scientific Management”. He joined as a
mechanic at midvale steel company in U.S.A at 1878. He became chief engineer in the year 1884 in the
same company. During his career spanning a period of 26 years, he conducted a series of experiments in
three companies: Midvale Steel, Simonds Rolling Machine and Bethlehem steel companies. While
serving as a Chief Engineer of Midvale Steel Company, Taylor made several important contributions,
which are classified under scientific management.
Taylor’s approach aims at increasing the operational efficiency of workers by solving their work
related problems, reducing in efficiency and wastage, improving their relation with management, and
developing a best way of doing things. Taylor expressed the basic philosophy of scientific management
in the following terms:
 Science, not rule of thumb: For solving problems and making decisions, the
manager should adopt scientific attitude and use scientific thinking and methods.
The ‘rule of thumb’ or ‘Hit or miss’ approach should be replaced.
 Harmony, not discord: All the departments and workers are a part of an
organization. There should be complete harmony or coordination in their
functioning and any kind of clash or conflict should not be allowed to crop in and, if
it arises, should be reduced to a minimum.
 Cooperation, not individualism: Instead of fostering individualism, importance
of cooperative group efforts should be recognised. Because, organizational
objectives depends upon the group efforts not for individuals.
 Maximum, not restricted output: Production should be carried out up to the
maximum capacity available in a unit.

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  Development of each man to his greater efficiency and prosperity: For the
prosperity of individual workers as well as the organization, the efficiency level of
workers should be increased by providing scientific training and developing their
potential abilities to the maximum.
Taylor based on his experience at the shop floor, developed guidelines to the practice of
management as under.
1) Scientific study and planning of work
Taylor has suggested that the work to be assigned to and performed by workers should be studied,
analyzed and planned as to determine the day’s fair work (standard of work) for each worker. In relation
to work, following studies should be conducted to the workers on what is to be done and how it can be
done, efficiently.
i) Work study
The object of work-study is to improve efficiency. Efficiency could be improved and increased
by expending fewer resources and reaping greater returns.
ii) Motion study
The object of motion study is to identify and eliminate unnecessary, avoidable and wasteful
movements and motions of men and machines. These movements and motions are closely watched and
recorded. On the basis of this study it can be determined whether the movements and motions are
productive or incidental or unproductive.
iii) Time study
It is popularly known as work measurement. It is basically concerned with productivity. The
exact time required to perform a job is accurately estimated. On the basis of this estimate the required
number of employees is determined, suitable wage incentive schemes are devices and actual labour costs
are worked out. The procedure followed in time study is to split the job into a number of component
parts the time taken to perform each part of the job is ascertained and standard timings for different parts
of a job are determined.
2) Scientific selection, placement and training
To build up a team of efficient workers, Taylor realized that using scientific methods, instead of
relying on intuition and judgement of the foremen should make selection. It implies selection of workers
for the job by tallying job requirements with abilities and skills. Workers should be given placement on
the basis of capability and aptitude. And, for developing the existing level of knowledge and potential
scientific training should be imparted to workers on a regular basis.

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3) Standardization
By minutely studying metal-cutting operations, Taylor suggested that the scheme of
standardization should be adopted in respect of trade tools and equipments, raw material used by
workers and physical working conditions provided to them. Any difference in the quality of raw
material, tools and equipments may directly affect level of efficiency of workers.
4) Division of responsibility between management and workers
Taylor advocated that two aspects of planning, thinking and doing should be separated. Planning
of work that is thinking process should be a responsibility of managers. They should design work
standards by conducting various studies, devise incentive scheme for workers, discipline them and
assign work to them. Whereas role of workers should be confined to implementation of these plans. In
this way benefits of division of labour and specialization may be secured.
5) Functional foremanship
Taylor introduced and practiced the concept of functional foremanship. According to this
concept instead of having one foreman as an in-charge for production department. All activities should
be grouped into two groups namely planning forum and workshop forum. Each forum should have four
supervisors to command over the activities of workers. In doing so dual command emerges, because
each worker will get orders and instructions from eight supervisors dealing with different aspect of his
job.
6) Mental revolution
In order to get desired results of scientific management there should be complete mental
revolution on the part of workers as well as management. Mental revolution is a process of bringing
drastic changes in their attitude, outlook and behavioural pattern in respect of their duties toward work,
toward their fellow workers and employers. Similar kind of changes in outlook should also take place
among managers towards workers and their problems. To bring the change in the mental attitude of both
sides Taylor, suggested scheme of workers participation in management and sharing surplus as bonus.
7) Differential payment
F.W.Taylor firmly believed that man is motivated by economic considerations. He, therefore,
introduced a new payment plan called ‘the differential piece work’. He linked incentives with
production. Accordingly a worker will be paid in direct proportion to how much be produced. That is a
worker will receive low piece rate if he produces the standard number of pieces and high rates if he
surpasses the standard. In the latter case, the higher rate would be applied to all the pieces the worker
produced, including those which were produced according to the standard.

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1.10.1.2 Administrative Theory of Management
Though administrative theory of management is based on the contributions of many scholars and
practitioners like Henri Fayol, Max Weber, Sheldon, Mooney, Allen and urwick, etc. But major part of it
relates to Foyal’s work.

Henry Fayol’s Administrative Theory of Management

Henri Fayol (1841-1925) is considered the ‘Father of administrative management theory’ with
focus on the development of broad administrative principles applicable to general and higher managerial
levels. Foyal started his career as a junior engineer in a coal mining company in France in 1860 and
became its general manager in 1880. He wrote a monograph in French in 1916, entitled “General and
Industrial Administration” which was translated into English in 1929.
It is in four parts of which the first part deals with classification of business activities as
technical activities (manufacturing or production), commercial activities (buying, selling and
exchange), financial activities (raising and optimum use of capital), accounting activities (recording,
costing and statistics), security activities (protection of persons and property), and administrative or
managerial activities.
Second part contained basic functions of management performed by the managers in all types
of organizations. In this way he identified five elements or functions of management process:
Planning, organizing, commanding, coordinating and controlling.
Third part consists of 14 principles of management as general guides to the management
process and management practice. These are as under.
1) Division of Work
Division of work in the management process produces more and better work with the same
effort. Various functions of management like planning, organizing, directing and controlling cannot be
performed efficiently by a single proprietor or by a group of directors. They must be entrusted to
specialists in related fields.
2) Authority and Responsibility
As the management consists of getting the work done through others, it implies that the manager
should have the right to give orders and power to exact obedience. A manager may exercise formal
authority and also personal power. Formal authority is derived from his official position, while personal
power is the result of intelligence, experience, moral worth, ability to lead, past service, etc.
Responsibility is closely related to authority and it arises wherever authority is exercised. An individual,

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who is willing to exercise authority, must also be prepared to bear responsibility to perform the work in
the manner desired. However, responsibility is feared as much as authority is sought after.
3) Discipline
Discipline is absolutely essential for the smooth running of business. By discipline we mean, the
obedience to authority, observance of the rules of service and norms of performance, respect for
agreements, sincere efforts for completing the given job, respect for superiors, etc.
4) Unit of Command
This principle requires that each employee should receive instructions about a particular work
from one superior only. Foyal believed that if an employee was to report to more than one superior, he
would be confused due to conflict in instructions and also it would be difficult to pinpoint responsibility
to him.
5) Unity of Direction
It means that there should be complete identity between individual and organizational goals on
the one hand and between departmental goals inter se on the other. The should not pull in different
directions.
6) Subordination of Individual Interest to General Interest
In a business concern, an individual is always interested in maximizing his own satisfaction
through more money, recognition, status, etc. This is very often against the general interest, which lies
in maximizing production. Hence the need to subordinate the individual interest to general interest.
7) Remuneration
The remuneration paid to the personnel of the firm should be fair. It should be based on general
business conditions, cost of living, and productivity of the concerned employees and the capacity of the
firm to pay. Fair remuneration increases workers’ efficiency and morale and fosters good relations
between them and the management.
8) Centralization
If subordinates are given more role and importance in the management and organization of the
firm, it is decentralization but if they are given less role and importance, it is centralization. The
management must decide the degree of centralization or decentralization of authority on the basis of the
nature of the circumstances, size of the undertaking, and the type of activities and the nature of
organizational structure. The objective to pursue should be the optimum utilization of all faculties of the
personnel.

20
9) Scalar Chain
Scalar chain means the hierarchy of authority from the highest executive to the lowest one for the
purpose of communication. It states superior subordinate relationship and the authority of superiors in
relation to subordinate at various levels. As per this principle, the orders or communications should pass
through the proper channels of authority along the scalar chain. But in case there is need for swift
action, the proper channels of authority may be short-circuited by making direct contact (called gang
plank) with the concerned authority.
10) Order
To put things in an order needs effort. Disorder does not need any effort. It evolves by itself.
Management should obtain orderliness in work through suitable organization of men and materials. The
management should observe the principles of “right place for everything and for every man”.
11) Equity
Equity means equality of fair treatment. Equity results from a combination of kindness and
justice. Employees expect management to be equally just to everybody. It requires managers to be free
from all prejudices, personal likes or dislikes. Equity ensures healthy industrial relations between
management and labour which is essential for the successful working of the enterprise.
12) Stability of Tenure of Personnel
In order to motivate workers to do more and better work, it is necessary that they should he
assured security of job by the management. If they have fear of insecurity of job, their morale will be
low and they cannot give more and better work. Further, they will not have any sense of attachment to
the firm and they will always be on the lookout for a job elsewhere.
13) Initiative
Initiative means freedom to think out and execute a plan. The zeal and energy of employees are
augmented by initiative. Innovation, which is the hallmark of technological progress, is possible only
where the employees are encouraged to take initiative. According to Fayol, initiative is one of the
keenest satisfactions for an intelligent man to experience, and hence, he advises managers to give their
employees sufficient scope to show their initiative. Employees should be encouraged to make all kinds
of suggestions to conceive and carry out their plans, even when some mistakes result.
14) Esprit De-Corps
This means team spirit. Since “Union is strength”, the management should create team spirit
among the employees. Only when all the personnel pull together as a team, there is scope for realizing
the objectives of the concern. Harmony and unity among the staff are a great source of strength to the

21
undertaking. To achieve this, Fayol suggested two things. One, the motto of divide and rule should be
avoided, and two, verbal communication should be used for removing misunderstandings
Fourth part of monograph deals with managerial qualities and skills, which should be
possessed by the managers. These are as: Physical qualities (health, vigour, personality), Mental
ability (abilities to understand and learn, to make decisions and creativity, etc.), Moral education
(Loyalty, dignity, ethical values, etc…), General education, Special knowledge and experience
(knowledge arising out of practice).

1.10. 2. Behavioral or neo-classical approach

Behavioural approach was evolved gradually over many years. This is based on strong conviction
that successful management depends on the ability of managers to understand the work, and
background, needs, values, perceptions and personality of people. This approach will be studied on the
following two phases, namely, Human Relation movement and Behavioural science approach.
a) Human Relation Movement
Under this approach Elton Mayo, Mary Parker, Follet, and Douglas McGregor have been the
main contributors to this approach. Among the above contributors Elton Mayo’s Hawthorne studies is
very popular.
b) Behavioural Science Approach
In view of certain inadequacies and drawbacks associated with human relation approach, many
other social and behavioural scientists for undertaking and analyzing human behaviour methodically
made concerted efforts. The term behavioural approach may be defined as systematic and scientific
analysis of human behaviour with a view to determine causes of working behaviour of an individual.
This approach is also known as “Organizational behaviour Approach”. It includes an interdisciplinary
approach of studying human behaviour consisting of psychology, sociology, physical and biological and
cultural variables of individuals. For this approach, different views were developed by various
behavioural scientists such as Douglas, McGregor, Abraham Maslow, Chester Bernard, Renis Likert and
Herbert Simon.

1.10.2.1. Elton Mayo’s theory of Hawthorne experiment

George Elton Mayo (1880 – 1949) was regarded as the “Founder and father of Modern
sociological and psychological Industrial research”.

Elton mayo was born in 1880 in Adelaide in Australia. He got a basic degree from Adelaide
University. He worked as a teacher initially. Then, he was advised to study psychology. He had become
22
a lecturer at the university of Queensland after completion of Master degree in psychology. Elton Mayo
went to the United States of America in 1922, and joined as a researcher at the Wharton Business School
of Pennsylvania University. Later on he was selected in the Graduate school of Business at Harvard
University in 1926. He was a professor of Industrial Research at Harvard University. He retired in 1947
and died in 1949. During his career he has published many books and papers.

Hawthorne experiments were conducted at the Hawthorne plant of the Western Electric
Company in Chicago from 1924 – 1932. Hawthorne plant was manufacturing telephone systems and its
parts. Nearly 30,000 employees worked during this experiment period. The company provides all
facilities to employees upto their satisfaction level. But the productivity of the employees was not to the
expectations of management. So, in 1924, the management requested National Academy of Sciences to
investigate the reasons for dissatisfaction of employees and decrease in productivity. On this basis,
Prof.Elton Mayo and his team conducted research. The objective of the experiment was to find out the
behaviour and attitude of employees under better working conditions. The results of these
experiments have been published into six volumes. They are the Human problems of Industrial
civilization, The social problem of an industrial civilization, The industrial worker, Leadership in a free
society, Management and worker and Management and morale.
Based on the problems, Prof.Elton Mayo and his team conducted researches in four phases. They
are:
 Illumination experiments (1924 – 1927)
 Relay Assembly Test room experiment (1927 – 1928)
 Mass interviewing programme (1928 – 1930)
 Bank wiring observation room experiments (1931 – 1932).

1. Illumination experiments
This research was conducted to determine the effects of changes in lighting on productivity. The
basic assumption of this research was that high lighting leads to productivity. This experiment was
conducted for two and a half years. Under this experiment, two groups were formed namely,
experimental group and control group. In the case of experimental group, variations in lighting were
made periodically and the results were observed and recorded. In the case of control group, there is no
change in the lighting and the researchers were requested to work under constant lighting system upto
the end of the experiment. It was observed that the output of both groups increased steadily. The
production decreased in two groups whenever the lighting falls below the normal level. This experiment

23
revealed that there is no relationship between lighting and productivity. It means that the improved
working conditions do not result in the increased productivity. As per this experiment, it is known that
informal social relations among the group members are the reason for increased productivity.

2. Relay assembly test room experiments

Relay assembly test room experiments were conducted to determine the effect of changes in
working conditions, length of working days, rest pauses, frequency of rest and duration and physical
conditions on productivity. A group of six women workers, who were friendly to each other selected for
this experiment. These women workers were told about the experiment and were made to work in a very
informal atmosphere with a supervisor – researcher in a separate room. The supervisor – researcher
acted as their friend, philosopher and guide. During the study several variations were made in the
working conditions to find which combinations was most ideal for production. Surprisingly, the
researchers found that the production of the group had no relation with working conditions. It went on
increasing and stabilized at a high level even when all the improvements were taken away and the poor
pre – test conditions were reintroduced. How this phenomenon came about nobody knew. The workers
were also not able to explain this phenomenon. They were neither closely supervised, nor motivated by
extra reward. Obviously, something else was happening in the test room, which was responsible for this.
Researchers then attributed this phenomenon to the following factors:
 Feeling of importance among the women as a result of their participation in
the research and the attention they got.
 Warm informality in the small group and tension – free interpersonal and
social relations as a result of the relative freedom from strict supervision and rules.
 High group cohesion among the women.
Elton mayo concluded that the work satisfaction depends to a large extent on the informal
social pattern of the work group.
3. Mass Interviewing Programme

The knowledge about the informal group processes, which was accidentally acquired in the
second phase made researchers design the third phase. This interview programme was conducted to
determine employees attitudes towards company, supervision, insurance plans, promotion and wages.
For this purpose they interviewed more than 20,000 workers. At first, direct questions were asked
relating to the type of supervision, working conditions living conditions and so on. But since the replies
were guarded, the technique was changed to non –directive type of interviewing, in which workers were
free to talk about their favourite topics related to their work environment. This study revealed that the

24
worker’s social relations inside the organization had an unmistakable influence on their attitudes and
behaviours. The study brought to light the all – pervasive nature of informal groups which had their own
culture and production norms which their members were forced to obey.

Mayo concluded that the workers were activated by logic of sentiment but the management is
concerned with logic of cost and efficiency. Thus, a conflict between the workers and the management
becomes inevitable.
4. Bank wiring Observation room Experiment
This experiment was conducted between 1931 and 1932. A group has been formed to conduct
this experiment. This group consisted of fourteen male workers. Out of these fourteen workers, nine
were wiremen, three were soldier men and two were inspectors.
The main aim of this experiment was to analyze how a group could influence a worker to restrict
his output even in the face of attractive incentive schemes for larger output. Hourly rate of wages was
fixed on the basis of average output of each worker and a group bonus scheme was announced. Group
bonus was to be determined on the basis of average group output. It was assumed that workers would
produce more and more in order to get maximum group bonus. Besides, the workers could help each
other to produce more. The company had not improved the working conditions for this experiment and
the company was not ready to analyse cause – effect relationships. But, a general observation was made
to know about an individual behaviour and the impact of group behaviour on the individual behaviour.
Under this experiment, workers have decided their target by themselves. The company target
was more than the target fixed by the workers. However, the workers have failed to achieve the target
due to the following reasons.

 Unemployment problem
 Unduly high standard
 Protection of slow workers
 Satisfaction of management
This experiments helped to arrive at the following conclusion:
 An informal relationship is responsible for deciding the human behaviour.
 The counseling was helpful in resolving management – employee conflicts.
 The existence of informal organization is quite common in all organization.
 The group had fixed standard output of their own only because of social pressure.
1.10. 3. Modern approach to management

25
 Modern approach represents latest developments, which took place after 1950. This
approach can be studied in the following four phases namely, Quantitative approach, System
approach, Contingent approach and Attributes of excellence.

1.10.3.1. Quantitative Approach

This approach also known as ‘management science approach’, has been developed during 1950.
It is based on the approach of scientific management. It offers systematic and scientific analysis and
solution to the problems faced by managers. The quantitative approach aims at achieving high degree of
precision, perfection and objectivity by encouraging the use of mathematical and statistical tools for
solving complex problems. These quantitative decision making tools are known as ‘Operations
Research’ like LPP, Simulation, queuing theory and game theory etc… It also implies use of computer-
aided technology in various fields like production, finance, costing, transporting and storage etc… In
simple terms, operations research may be regarded as application of scientific methods for solving
problems and scientific methods for solving problems and scientific methods consist of the following
stages.
 Dividing problems into small and simple components
 Gathering required information on each component
 Analysis of data so collected
 Finding out solution to problem in hand.

The quantitative approach which involves use of knowledge and skills of several other disciplines such
as statistics, engineering and accounting etc… has contributed significantly to management theory and
behaviour. This approach has very limited application that too only in respect of problem solving and
decision-making.
1.10.3.2. Systems Approach
Systems approach of management represents new thinking and latest developments related to
organization and management. It was developed after 1950 emphasing interdependence and
interrelationship among various activities of organization. Basically this approach aims at identifying the
nature of relationship among various components of the organization, which is considered as larger
system. The term system may be defined as a set of interrelated and interacting components assembled
in a particular sequence as to produce some results. These components may also viewed as sub-systems
of larger system. It is only through this sub–systems the larger system operates, thus larger system can
be viewed as a whole entity or totality. The various sub-systems which are involved in the functioning of

26
larger one are closely related to each other and to a system as a whole. Similarly, these sub-systems
interact with each other by getting influenced and influencing others. Every system has sub-system and
every sub-system may be considered as a system because, it may have a sub-systems.

The system approach defines an organization as a complex whole consisting of mutually interdependent
and interacting parts, which are viewed as sub-system. Therefore the approach is said to be holistic in
nature assuming that whole is greater than the sum of its parts.

The system may be broadly classified into four categories. They are as follows
 Physical system
 Mechanical system
 Biological system
 Social systems.
Physical systems are the part and parcel of the nature or sub-system, of it totally governed and
regulated by the nature. For example, solar system, seasons and rivers, etc…
Mechanical systems refer to those devices, which are based on technology. These systems have
been innovated by human beings for their betterment but are totally closed systems in nature, as they do
not interact with external environment such as machines, motorcars, electronic appliances and consumer
durables etc…
Biological systems are those systems, which regulate and control existence and survival of all
living species, human and plants are good examples of biological systems.
Social systems may be defined as systems, which have been developed by human being to
facilitate co-operative working to overcome the problem of isolation and desolation. All kinds of small
and big formal and informal and economic and non economic organizations are examples of social
systems.
1.10.3.3. Contingency Approach
Contingency approach, though related to system approach, represents comparatively new line of
thinking among management scientists. This approach basically aims at attempting to take a step away
from universal application of managerial principles a recommending that the application of these
principles is subject to appropriateness of the situation. It is a systematic attempt to determine package
of management technique, approaches and practices which are appropriate in specific situation.
The contingency approach offers following guidelines for the managers.

27
  Contingency approach is situation oriented urging upon the managers to study, analyse
and diagnose the situation. It is to be done in terms of components variables of the situation and
external factors affecting the situation.
 Subsequently, after the analysis of the situation, the managers are expected to prepare
inventories of management theory, principle, techniques and concepts.
 In order to tackle the situation efficiently the validity and applicability of management
tools and techniques is to be examined and finally package of these tools and techniques is
prepared which is appropriate for that specific situation. The different situation requires different
managerial response.
1.10.3.4. Attributes of Excellence
This approach has been developed by Thomas J.Peter and Robert H.Waterman, management
consultants of USA in 1982. They published a book popularly known as “In Search of Excellence”
which was considered as remedy for solving productivity-related problems faced by American
companies. In view of its wide acceptance this approach deserves mention in the historical development
of management thoughts. After having surveyed and interviewed thirty six excellent’ companies out of
sixty –two best managed companies USA in terms of innovation and profitability they isolated eight
attributes of excellence described below.

S.No. Attribute of Key indicators

excellence
1 A base for action Small scale, easily managed experiments to build knowledge,
interest, and commitment. Management stay visible and
personally involved in all areas through active informal
communication and spontaneous management by wondering
around (MBWA).
2 Close to the customer Customer satisfaction is practically an obsession. Input from
customers is sought throughout the design, production
marketing cycles.
3 Autonomy and Risk taking is encouraged; failure is tolerated in projects to see
entrepreneurship them through competition. Flexible structure permits the
formation of ‘Skunk works’ (small team of zealous innovators
working on special projects) Lot of creative swings are
encouraged to ensure some home runs (Successful products)

4 Productivity through Individuals are treated with respect and dignity. Enthusiasm,
28
 people trust and family feeling are fostered. People are encouraged to
have fun while getting something meaningful accomplished.
Work units are kept small and humane.
5 Hands-on value driven A clear, company’s philosophy is disseminated and followed.
Personal values are discussed openly not buried. The
organizations belief system is reinforced through frequently
shares stories, myths, and legends. Leaders are positive role-
model not do as I say not-as-I-do, authority figure.
6 Stick to the knitting Management sticks to the business it knows best emphasis is on
internal growth not merger.
7 Simple form lean staff Authority is decentralized as much as possible. Headquarters’
staffs are kept small; talent is pushed out of field.
8 Simultaneous loose- Tight overall strategic and financial control is counter-balanced
tight properties by decentralized authority, autonomy and opportunities for
creativity.
(Source: Peter and Watermain’s eight attributes of excellence from In Search of Excellence.)

1.11. Difference between Management and Administration

Sl.No Point of Distinction Administration Management

1 Management means
Administration means overall
essentially an executive
determination of policies, settings
function, the active direction
of major objectives, the laying out
of human efforts getting
of broad programmes, major
things done.
Definition projects and so forth.
(i.e., Management is
(ie., Administration means
considered as an operative
determination of goals,
function of carrying out
formulation of plans and policies
plans and policies for
of the organization.)
achieving objectives.)
2 Executive or doing
Nature Deterministic or thinking function
function

It is concerned with the

It is concerned with the
3 Scope determination of major objectives
implementation of policies
and policies

29
 It is largely a middle and
4 Level It is a mainly a top-level function
lower- level function

Managerial decisions are

Influence Administrative decisions are
influenced mainly by
5 influenced mainly by public
objectives and policies of
opinion and other outside forces.
the organization

It is actively concerned
Direction of human It is not directly concerned with with the direction of human
6
efforts the direction of human efforts efforts in the execution of
plans

Directing and organizing

Planning and control are the main
7 Main function are the main functions
functions involved in it
involved in it.

8 Skills required Conceptual & human skills Technical and human skills

Used largely in government and Used mainly in business

9 Usage
public sector organizations

Managing Director,
Minister, Commander,
General Manager, Sales
10 Examples Commissioner, Registrar, vice-
Manager, Branch Manager
Chancellor, Governor etc…
etc…

1.12. Management as a Science or an art

1.12.1. Management as a Science
Science is not only using the test tube or the lab coat, but also they are implicit in the method of
inquiry used by a discipline for gathering data. We can call it as a discipline, as it is a scientific on the
following grounds:
1. Methods of inquiry are systematic and empirical;
2. Information can be gathered, recorded and analysed; and
3. Results are cumulative and communicable.
Systematic means the recorded and analyzed data or being ordered and unbiased. All scientific
information collected as raw data and finally ordered and analysed with the help of statistical tools. It
thus becomes communicable and intellectual. Communication of results also permits repetition of the
study, if need, by the investigator or others. When the study is repeated and the second try provides
results similar to the first one, which derives much more confidence in those results.

30
 On the basis of the above definition of science we may perceive the management is also a science.
The word ‘science’ is used to denote two types of systematic knowledge: natural or exact and
behavioral or inexact. Some more explanation of the scientific nature of management is needed.
Management is not like the exact or natural sciences such as physics, chemistry, etc. Management is a
behavioural/social science. It is possible for us to study the effects of any one of the factors affecting a
phenomenon individually by making the other factors in operative for the time being. For example, in
physics it is possible for anyone to study in a laboratory, the effects of, say, only heat on the density of
air by holding other factors (such as humidity, etc) constant for the duration of the experiment. But the
same thing is not possible in management where we have to study man and a multiplicity of factors
affecting him. It is not possible to study the effect of, say, only monetary incentives on a worker’s
productivity because this effect will always be found to be mixed with and inseparable from other
factors such as the leadership style of the worker’s supervisor, worker’s need hierarchy, the pressure of
his co-workers, etc. At best, we can get only a rough idea of the relationship between the two. In other
words, our findings are not going to be as accurate and dependable as those of the physical sciences.
We may tell about tendencies and probabilities of management. We may, therefore, place management
in the category of a behavioural science.

1.12.2. Management as an Art:

Art is concerned with the understanding of how a particular work can be accomplished.
Management in this sense is an art. It is the art of getting things done through others in dynamic and
mostly non-repetitive situations. Whether it is a factory or a firm the resources like men, machine and
money have to be coordinated against several constraints to achieve given objectives in the most
efficient manner. The manager has to constantly analyse the existing situation, determine the
objectives, seek alternatives, implement, coordinate, control and evaluate information and make
decisions.

Knowledge of management theory and principles is indeed a valuable aid and kit of the manager
but it cannot replace his other managerial skills and qualities. This knowledge has to be applied and
practiced by the manager just as the medical or legal practitioners practice their respective sciences. In
this sense, management is an art. It is like the art of a musician or the art of a painter who seeks to
achieve the desired effect with colour or instruments, but mainly with his own skill.

31
 We may thus conclude that management involves both elements those of a science and an art.
While certain aspects of management make it a science, certain others, which involve application of
skill, make it an art.

1.13. Difference between Managers and Entrepreneurs.

An entrepreneur
An entrepreneur is the person (or group of persons) at the top of any business concern who
undertake financial and legal responsibility for the success or failure of the concern.
Decision-making by the entrepreneur is the mainly with regard to the following
 Goals and objectives of the enterprise and broadly how these are to be accomplished.
 The kind of image the enterprise is to project of itself and how it is to conduct it self in general.
 The kind of products to be manufactured whether top quality and useful products, or low quality
and not so useful products.
 The concern’s attitude towards its employees, the government, society and so on.

Manager
A manager is an employee of the entrepreneur. His job is to work for the accomplishment of the
goals and objectives set by the entrepreneur.
There may be cases where a person is both an entrepreneur and a manager at the same time as,
for example, in the case of the sole proprietor or the managing partner of a firm. Even so the managerial
functions performed by him in this capacity are the same as those of any non-owner manager.
Difference between entrepreneur and manager
The main difference between an entrepreneur and a manager is with regard to the degree of
freedom enjoyed in his work. Being the owner of the undertaking, the entrepreneur is free to determine
the objectives based on his own assessment, beliefs and values. Limitations imposed by the external
environment and, to a certain extent, availability of resources will also influence him in this regard.
However, the manager is only concerned with the direction and coordination of the resources to
accomplish the objectives in the determination of which he may, or may not have had any role. In any
case, his own values and beliefs have necessarily to take a back seat because the nature of his work
requires him to act rationally and thoughtfully toward the accomplishment of organizational objectives.

32
1.14. Distinguish between the manager and the leader

Manager Leader
He drives and orders He coaches and advises
He depends on his authority He depends on his confidence and goodwill.
He engenders fear He inspires enthusiasm
He fixes blames and finds faults He solves problems
He knows all the answers He consults and seeks advice
He makes the work drudgery He makes the work a game.
He believes in “I” He believes in “We” and “Your”.

FORMS OF ORGANISATIONS

Business:
Business is the economic activity the regular production and or distribution of goods and services
with the object of carrying profits through the satisfaction of human needs and wants.

A person or group of persons engaged in a trade, service, mercantile, commercial or industries

undertaking for profit

Business is used to describe all the commercial activities undertaken by the various
organizations which are produce, supply and sell goods or services

Organizations:

An organizations is a group of people who cooperate together for a common purpose.

An organization is asocial unit or human grouping, deliberately structured for the purpose of the
attaining organizational or common objectives

Organization is identifiable group of people contributing their efforts towards the attainment of
objectives or goals

Business organizations:

A business organizations is a business unit formeds for the purpose carrying on some kind of
economic activity. It is a concerned with production and distribution of goods and services.

Forms of business organizations:

The different form of business can be classified in to the following categories

33
 o The sole proprietorship
o The partnership
o Cooperative firms
o Companies

The sole proprietorship:

The sole proprietorship is a form of business that is owned and controlled by a single individual.
This form of organization is also known as individual proprietorship, sole trader, and individual
enterprises. It is the simplest and easiest form of business.
The proprietor invests his own capital, skills, and intelligence and he receives all the profits and assumes
all the risks of ownership.

Characteristics of sole proprietorship:

Individual ownership:

The individual entrepreneur constitutes the sole owner of the industry as it is who contributes the
capital and other assets.

ii) No separate entity of business:

The law does not make any distinction b/w the sole proprietor and his industry.
The proprietor and his industry are considered to be one and another same.

iii) Un limited liability:

In the cases the assets of the industry are not sufficient to pay off the liabilities, the private
property of the sole proprietor attached for paying the debt

iv) Individual management and control:

the sole proprietor undertake to manage and control the affairs of his business. As there is a no
one to consult, he will take quick and fast decisions in all matters

v) Free from government regulations:

a sole proprietor need not comply with the legal formalities at the time of formation of the
business.

Advantages of the sole proprietorship:

i) Easy formation:

The formation of this organization is the easiest, when compared to other forms of organization
ii) Maintaining the secrets of business:
Secrecy is the vital importance for the success of any business and a sole trader is in an eminent
position to keep hi affairs to himself.

34
iii) Quick decision:

Decision making is one of the important functions of every industrialist . The sole proprietor is
the supreme judge and master of his business makes a prompt decisions.

iv) Flexibility:
A modern business functions in an environment which keeps changing frequency.
A sole proprietor being constantly in tough with the business and its operation can adjust his business so
as meet the the needs of the changing environment.

v) Tax advantages:
There is no distinction b/w sole proprietor and his business. A sole proprietor pay s his tax as the
same way as any individual.

Disadvantages of sole proprietorship:

i) Limited capital:
The amount of the capital that is at the command of a sole trader is limited. The amount of loan
that can be is also limited as its depends upon his credit worthiness.

ii) Limited management ability:

In this form of organization the sole proprietor performs all the functions and attaining
customers. This will over burden to him when he will expand his business.
iii) Un limited liability:
The liability of a sole proprietor is unlimited. This means his private property can be used to pay
off the debts of the business, if it has less of assets.
iv) Lack of confidence:
As the sole proprietor is not obligated to publish his accounts, people will not response their
confidence in this form of organization.

v) No sharing of entire loss:

If unfortunately the business is subject to loss, the entire risk of loss is to borne by the sole
proritor himself.

Partnership organization:

The law of partnership is contained in the Indian partnership Act, 1932 Which came in to force
st
on 1 Oct 1932. The act substantially based on the English law on the subject as contained in the
partnership Act 1980.

Definition:

“ Partnership is the relation between persons who have the agreed to share the profits of a
business carried on by all or any of them acting for all”

“ Person who have entered into partnership with one another are called individually “ partners”
and collectively “firm”.

35
 Indian partnership act, 1932

Characteristics of partnership:

i) Association of two or more members

` The minimum no of persons required to form a partner is two. As regards the maximum number
of partners in a firm, section 11, of the company act , 1956 provides that the number of partners in a firm
carrying on banking business should not exceed ten and in any other business twenty.

ii) Mutual agreement:

The form of organization is established by a contractual agreement entered into a by all the
partners. So any person who does not qualified to enter a contract cannot join a partnership business.
The Indian partnership Act, 1932. Section 5 clearly states that, “the relation of partnership arises from
contract and not from status”.

iii) Lawful business:

The contractual agreement entered into by the partners must be for a laeful purpose. An
agreement by two dacoits to commit a theft and share the loot is not a lawful partnership business.

iv) Sharing on profits:

The purpose of partnership should be to earn profits and to share it. In the absence of any
agreement, the partners should share profits in equal proprietorships.

v) Collective management:
It should be collective management to attainment of common goals.

vi) Registration of firm:

Registration of a partnership in not compulsory under the Indian partnership Agt, 1932. The only
document – or even an oral agreement among partners is required partnership deed to bring the
partnership into existence.

Types of partners:

1) Working or acting partner

2) Dormant or sleeping partner
3) Partner in profit only
4) Nominal partner
5) minor partner

Working or acting partner:

36
 A person who takes active interest in the conduct and management of the business of the firm is
known as working partner. He also called as managing partner. He carries on business on behalf of the
other partners.

Dormant or sleeping partner:

A sleeping partner is one who is neither active nor known to the outsiders. In reality he is a
partner silent in the firm and also contributes his share in the business. Sleeping is also called as a
secrete partner.

Partner in profit only:

When a partners agrees with the others that he would be only share the profits of the firm and
would not liable for its losses, he known as partner ion profit only.

Nominal partner:
A partner, who lends his name and reputations for the benefit of the firm, without having any
real interest in it, is called a nominal partner. he contributes no capital, gets no share in profit and takes
no part of the management.

Minor partner:
A minor partner is one who is below the age of 18 years. According to the sec 11, of the Indian
contract act, an agreement by or with the minor is void as such incapable of entering into a contract of
partnership. But under section 30, Indian partnership act, 1932, a minor can be admitted to the benefits
of partnership with the consent of all partners.

Advantages of partnership:

i)Easy to form:
The formation of partnership is quite simple and there are not much legal complications. Even
registration with registrar of firms has quite simple procedure.

ii) Large amount of capital:

As the number of partners is more than one, it is possible to pool a larger amount of capital in
this form of organization.

iii) Flexibility of operation:

Changes in the activities of a firm can be brought about mutual agreement of partners. A
partnership deed can also be changed without much difficulty so as enable the business to incorporate
the necessary changes.
iv) Balanced judgment:
The decisions in a partnership firm are taken by the joint consultation of all the partners. Any
problem that is viewed from various angles and take an appropriate decision upon.

vi) Management and control:

The management and control of firms lies in the hands of partners . this enables the partners to
manage enthusiastically and by hard work.

37
Disadvantages of partnership:

i) Instability:
The success of the partnership business depends up on the mutual confidence of the partners. So
it will leads to the in stability of the partners in the business

ii) Non transferability of interest:

No partner can assign or transfer his share to any other person so as to make him a partner in the
business without the consent of all other partners.

iii) Unlimited liability:

The liability of partners in a partnership firm is unlimited and its both joint and several .this
means, if the assets of the firm are not sufficient to pay off the debts, the creditors can either collect the
debt from all the partners collectively or from each partner individually, defending upon the resources at
the command of the partners.

iv) Mutual conflicts:

Whenever any differences arise among partners, they lead to loss of trust and confidence. This
may cause misunderstanding, thereby resulting in conflicts and disputes.

v) Lack of public confidence:

As a partnership business is controlled by only the partners themselves, it is not bound to publish
its accounts or to furnish any returns to the government.

Co – Operative form of Business

Definition
“Co – operative organization is an association of persons usually of limited
means who have voluntarily joined together to achieve a common economic end through
the formation of a democratically controlled business organization, making equitable
contributions to the capital required and accepting a fair of risks and benefits of the
undertaking”
- International Labour Organization

“A society which has its objects the promotion of the economic interests of its
members in accordance with co-operative principles”.
(Or)
“A co-operative society may be defined as an association of adult persons, with
limited resources and belonging to a homogeneous group, who join together on a
voluntary and equal basis for the realism of their common economic interests in a
democratic way”.

38
 - Section 4, Co-operative Societies Act, 1912
From the above definition, it is clear that it is all along believed that co-operation is collective
effort by weaker people to pull on in a spirit of doing some work together, in the spirit of give and take
with a view to achieving some common purpose.
Characteristics/ Features of co-operative forms
i) Voluntary association
It is a voluntary association. There can be no use of force in it. It is open to the people to join it.
The members who join the organization can withdraw at any time, as and when they like. No distinction
is made between caste, sex, creed, religion of the persons while admitting to the membership of the
society.
ii) Finance
The capital of the society is raised by the issue of shares. But the share capital is much less when
compared to a joint stock company.
iii) Management and control
The affairs of a co-operative society are managed by the elected representatives of managing
committee.
iv) Disposal of surplus
The surplus amount of revenue is not fully distributed as profit to the members of the society. It
transfers 25% of its revenue to a general reserve and 10% for general welfare of the loyalty in which the
society is functioning. The balance is distributed as profit to its members.
v) State control
A co-operative society is governed by the Co – Operative Societies Act, 1912. Besides, the co-
operative form of organization is governed by the co-operative societies Acts as are enacted by the
various state governments. In addition to this, the society has to submit various documents to the
Registrar of Co – Operative societies.
vi) Service Motto
When compared to other forms of organizations, a Co – Operative form of organization is
formed to render service to its members but not to earn profit.
vii) Corporate status
A Co – Operative society assumes a distinct legal status after it comes into force. i.e., the
members are considered to be quite separate from the society although they are the owners of the share
capital of the society.
viii) Tax exemption

39
 A Co – Operative society is exempted from paying tax to the government because it encourages
the formation of large number of societies.
ix) Number of members
The minimum number of persons required to form a society is ten and there is no limit of the
maximum.
x) Maintenance of Accounts and Audit
A Co – Operative society has to compulsorily maintain its accounts and they are to be audited by
the auditor of Co – Operative societies.
Types of Co-Operatives
Co – Operative societies are classified into five categories
 Co – Operative Credit Societies
 Consumer’s Co – Operative Societies
 Producer’s Co – Operative Societies
 Co – Operative Marketing societies
 Co – Operative Housing Societies

a) Co – Operative Credit Societies

These societies are formed to promote the saving habit among members and to provide credit to
needy persons at a reasonable rate of interest.
b) Consumer’s Co – Operative Societies
These societies are formed to provide good quality of goods at reasonable prices. By eliminating
middlemen, it is possible to sell the goods at lower prices.
c) Producer’s Co – Operative Societies
These societies are established to provide the required raw materials, tools and equipments to
their members to enable them to manufacture goods at a lower cost. Goods produced by the members
are sold to the society at specified rates and the society in turn sells the same in the market at the
prevailing marketing prices. The profit earned by the society is distributed among the members at the
agreed rules.
d) Co – Operative Marketing Societies
These societies are formed to sell the product of the members in the market at a reasonable price.
The societies carry out the functions of standardization, grading, packing etc… in respect of goods

40
delivered to them by the members. The profits earned by the societies are distributed to their members
according to the quantity and vale of goods delivered by them to the societies.
e) Co – Operative Housing Societies
These societies are formed to provide residential accommodation to members either on
ownership basis or at reasonable rent.
Advantages of Co – Operative Societies
i) Easy formation
Unlike a joint – stock company, a Co – Operative society is easy to form. It is neither expensive
nor time – consuming when compared to a company form of organization.
ii) Democratic Management
The society is managed by the elected representatives of its members. The committee of
management is elected on the principle of “one – man one – vote”.
iii) Limited Liability
The liability of members in a Co – Operative society is limited. They cannot be asked to
contribute any money if the society incurs any losses.
iv) Scope of Internal Finance
As the Co – Operative society transfers a minimum of 25% of its earning towards the general
reserve; it can be used to expand the activities of the society.
v) Continuity
As the Co – Operative society is a distinct entity separate from its members; its life is not
affected by the death, insolvency or insanity of its members.
vi) Cooperation from members
In a Co – Operative form of organization, members voluntarily offer their services in performing
the various activities such as accounting, purchasing, sales etc…
vii) State assistance
Very often the government provides assistance in respect of purchasing machineries on hire –
purchase system, loan facilities, tax exemption etc…
viii) No credit dealings
As a matter of principle, a society deals only on cash basis but not on credit basis. The question
of incurring bad debts does not arise in this form of organization.
ix) Better services

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 A Co – Operative offers better services to its members as for example the goods supplied are of a
better quality and at reasonable prices. The unethical practices such as adulteration and black marketing
are not possible in a Co – Operative form of organization.

Disadvantages of Co – Operative Societies

i) Limited amount of capital
The amount of capital at the disposal of a Co – Operative society is very less because of the
small denomination of the shares. With a small amount of capital, the volume of business carried out is
also small.
ii) Inefficient Management
As a society is managed by low – paid employees, it is not managed very efficiently. Further, in
most cases, it is managed by members themselves who may lack business acumen.
iii) Lack of secrecy
The business secrets cannot be maintained because of numerous members dealing with the
business. Further, the publication of its accounts reveals all the particulars of profit and its financial
position to outsiders.
iv) Slackness in business
The society does not function all throughout the day. Sometimes, it works only for a few hours in
a day. Further, absence of competition makes it a weak form of organization.
COMPANIES:

Meaning:

A company means an association of several persons who contributes money,s worth to joint or
common stock and employ it in. i.e., a company has a separate legal identity from its owners and will
continue to operate even if the owners and managers change.

Definition:

“A company may be defined as an artificial person recognized by law with a distinct name,
common seal, a common capital comprising transferable shares of fixed value, carrying limited liability
and having a perpetual succession”

“ A company may be defined as a voulntory association of individuals for profit, having a

capital divided into transferable shares, the ownership of which is the condition of membership”

Characteristics of company:

i) Separate legal entity:

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 A company is considered to be quite distinct from its members. In the eyes of law, it is a separate
entity with a corporate status. Thus it can be suing others and be sued others.

ii) limited liability:

The liability of a shareholders is limited to the extent of amount remaining unpaid on shares held
by him. This means, once he pays the whole amount on shares, he cannot be asked to bring further
amount from his private property to meet losses and payoff debts.

iii) perpetual existence:

The company has perpetual succession as one of its distinctive features. It means the life of a
company is independent of the life of its shareholders. The company is not affected by death. Insanity or
insolvency of its members.

iv) Common seal :

As accompany is an artificial person it cannot speak or sign documents on its own. To facilitate
entering into contract with outsiders, the companies common seal is affixed on all documents and serve
the purpose evidence, two directors of company will sign such documents on behalf of the company.

v) Management and control :

Company from of organization, management is carried on by a group elected representatives of
shareholders . although shareholders are the owner of the share capital of the company, they don’t take
part in the management of a company.

vi) Accounts and audit:

The accounts and audit are to compulsory in all companies. The accounts are to be prepared
according to the requirements of the company Act, 1956 and audited by an auditor of the company.

Private limited companies:

The companies Act,1956 defines a private limited company as a company which by its articles

• Restricts the rights of its members to transfer their shares in the company
• Limits the number of its to fifty as maximum and two as minimum, excluding its present or past
employees who are members of the company
• Prohibits any invitation to subscription of its shares and debentures from the general public.
• Whose name should end with words private limited

Public Limited company:

The company Act,1956 defines a public company as one which not a private company. In other
words, the members of a public company can freely transfer their shares.

Public limited company has at three directors and atleast seven members minimum
• Which has no upper limit regarding its members
• Which invites public to subscribe to its shares or debentures
• This has the liability of its members limited
• The public limited company accounts must be disclosed to people
• The public limited company can issue prospectus for subscription to its shares and debentures

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Difference Between private and public company:

S.no Private company Public company

1 A private company can start business It can start business only after obtaining
immediately after obtaining a certificate to commerce business from
certificate of in corporation Register
2 It must have the word private limited It will only limited as part of its name
as part of its name
3 It is not necessary to file prospectus It must file prospectus or, where no
or statement in lieu of prospectus prospects is issued, statement in lieu of
with register prospectus with the register
4 Only two signature are adequate for Seven persons will have to sign
memorandum and articles of memorandum and articles of association
association
5 This company is prohibited from Public company can invite public through
inviting public to subscribe to its prospectus to subscribe to its shares and
shares or debentures debenture
6 Restricts the rights of its members to The members of a public company can
transfer their shares in the company freely transfer their shares
7 there must be at least two director s There must be at least three directors and
and two members seven members
8 The maximum number member is 50 There is no maximum limit.
excluding present and past
employees
9 There are no restrictions on the There are certain conditions to be
allotment shares fulfilled before allotment of shares
10 The company need not hold statuary Must hold statutory meeting and file
meetings nor file statutory report statutory report with register
with register

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 Unit - II
PLANNING
2.1. Meaning
Planning is the fundamental/primary function of management. Planning is the function that
determines in advance what should be done. It is looking ahead and preparing for the future. It is a
process of deciding the business objectives and charting out the methods of attaining those objectives.
In other words, it is the determination of what is to be done, how and where it is to be done, who is to do
it and how results are to be evaluated. Plans made by top management of the organizations whole may
cover periods as long as five or ten years. Also, plans made by middle or first line managers, cover such
shorter periods. Such plans may be for the next days or weeks, or months, etc… for example, for a two-
hour meeting to take place in a week.
2.2. Definition of planning

There are numerous definitions of planning. Different experts have defined different points of
view.

“Planning is an intellectual process, the conscious determination of course of

action, the basing of decision on purpose, acts and considered estimates”.
- 32Koontz & O’Donnell

“Planning is deciding in advance what is to be done. When a manager plans, he

projects a course of action, for the future, attempting to achieve a consistent,
coordinated structure of operations aimed at the desired results”.
- Theo Haimann
“Planning is the thinking process, the organized foresight, the vision based on fact
and experience that is required for intelligent action”.
- Alford & Beatty

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2.3. Nature of Planning (Characteristics/Features of Planning)
1. Planning is goal – oriented
Planning involves setting the objectives of an organization for achieving the business targets well
in time. Objectives can easily be achieved by a sound planning process.
2. Planning is a primacy
Planning precedes other functions in the management process. It is the primary requisite before
other managerial functions step in. The other managerial functions, viz., organizing, staffing, directing
& controlling can be performed only after the necessary planning has been done. So it gets primary
everywhere.
3. Planning is all - pervasive
Planning is a pervasive activity covering the entire enterprise with all its segments and every
levels of management. It is equally important for large and small firms.
4. Planning is an intellectual/rational process
Planning is a mental exercise involving imagination, foresight and sound judgement. It is not
guesswork or wishful thinking. Managers take the necessary steps to fight against future events. So it is
a process of looking ahead.
5. Planning is a continuous process
Planning is a never – ending activity. It is a dynamic exercise. One plan makes another plan to be
followed by a series of other plans. Again constant changes make planning a continuous activity.
6. Planning is a precision
The meaning, scope and nature of planning must be precise. It must pinpoint the expected results
exactly. Any error in planning may lead to serious mistakes in the other functions.
7. Planning involves Choice
Planning is essentially decision – making or choosing among alternative courses of action.
Planning presupposes the existence of alternatives. Plans are decisions made after evaluation of
alternative courses of action. A planning problem arises only when an alternative course of action is
discovered.
8. Planning is directed towards efficiency
In general, all management functions including planning is directed towards increase the
efficiency of the firm. Corollary of planning is (a) Planning is an intellectual activity that aims the best
way of doing things, and (b) planning provides with goals and objectives. Thus planning is directed
towards efficiency.

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9. Flexibility of planning
Planning is flexible as commitment, which is based on future course of action. These are always
dynamic. Therefore, an adjustment is needed between the various factors and planning.

2.4. Importance of Planning

a) Minimizes Risk and Uncertainty
In today's increasingly complex organizations, intuition alone can no longer be relied upon as a
means for making decisions. This is one reason why planning has become so important. By providing a
more rational, fact-based procedure for making decisions, planning allows managers and organisations
to minimise risk and uncertainty. In a dynamic society such as ours, in which social and economic
conditions alter rapidly, planning helps the manager to cope with and prepare for the changing
environment. Planning does not deal with future decisions, but with the futurity of present decisions.
The manager has a feeling of being in control if he has anticipated some of the possible changes and has
planned for them. It is like going out with an umbrella in cloudy weather. It is through planning that the
manager relates the uncertainties and possibilities of tomorrow to the facts of today and yesterday.
b) Leads to Success
Planning does not guarantee success, but studies have shown that, often things being equal,
companies which plan not only outperform the non planners but also outperform their own past results.
This may be because when a businessman's actions are not random or ad hoc, arising as mere reaction to
the market place, i.e., when his actions are planned, be definitely does better. Military historians
attribute much of the success of the world's greatest generals to effective battle plans.
Planning leads to success by going beyond mere adaptation to market fluctuations. It proacts. It
involves an attempt to shape the environment on the belief that business is not just the creation of
environment but its creator as well.
c) Focuses Attention on the Organization’s Goals
Planning helps the manager to focus attention on the organisation's goals and activities.
This makes it easier to apply and coordinate the resources of the organisation more efficiently. The
whole organisation is forced to embrace identical goals and collaborate in achieving them. It also
enables the manager to chalk-out in advance an orderly sequence of steps for the realisation of an
organisation's goals and to avoid a needless overlapping of activities.

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d) Facilitates Control
In planning, the manager sets goals and develops plans to accomplish these goals. These
goals and plans then become standards or benchmarks against which performance can be measured. The
function of control is to ensure the activities conform to the plans. Thus, controls can be exercised only
if there are plans.

2.5. Steps in Planning/Planning Process

The steps generally involved in planning are as follows:
 Establishing Verifiable Goals or Set of Goals to be achieved
 Establishing Planning Premises
 Deciding the planning period
 Finding Alternative Courses of Action
 Evaluating and Selecting a Course of Action
 Developing Derivative Plans
 Measuring and controlling the Progress

1.Establishing Verifiable Goals or Set of Goals to be achieved

The first step in planning is to determine the enterprise objectives. Upper level or top-level
managers most often set these, usually after a number of possible objectives have been carefully
considered. There are many types of objectives managers may select such as a desired sales volume or
growth rate, the development of a new product or service, or even a more abstract goal such as
becoming more active in the community. The type of goal selected will depend on a number of factors
like the basic mission of the organization, the values its managers hold, and the actual and potential
abilities of the organization.
2 Establishing Planning Premises
The second step in planning is to establish planning premises. Plans are prepared for future.
But future is uncertain. Therefore, management makes certain assumptions about the future. These
assumptions are known as planning premises. Planning premises are vital to the success of planning as
they supply pertinent facts and information relating to the future such as population trends, the general
economic conditions, production costs and prices, probable competitive behaviour, capital and material
availability, governmental control and so on.,

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Planning premises can be variously classified as under:
 Internal and external premises.
 Tangible and intangible premises.
 Controllable and non-controllable premises.
(a) Internal and external premises
Internal Premises refer to the factors within the enterprise. These includes include sales
forecasts, policies and programs of the organization, capital investment in plant and equipment, skill of
the labour force, other resources and abilities of the organization in the form of machines, money and
methods, and beliefs, behaviour and values of the owners and employees of the organization.
External premises are those, which lie outside of the firm. It may be classified in three group’s
viz.,
(a) General business environment including economic, political and social conditions,
(b) The product market consisting of the demand & supply forces for the product or
services, and
(c) Factors, which affect the resources available to the enterprise.
(b) Tangible and intangible premises
Some of the planning premises may be tangible while some others may be intangible. Tangible
premises are those, which can be quantitatively measured. For example, Population growth, industry
demand, capital and resources invested in the organization are all tangible premises whose quantitative
measurement is possible.
Intangible premises are which being qualitative in character cannot be so measured. For
example, political stability, sociological factors, business and economic environment, attitudes,
philosophies and behaviour of the owners of the organization are all intangible premises whose
quantitative measurement is not possible.
(c) Controllable and non-controllable premises
Those while some of the planning premises may be controllable, some others are
non-controllable. Those premises, which are entirely within the control and realm of management, are
known as Controllable premises. Some of the examples of controllable factors are the company's
advertising policy, competence of management members, skill of the labour force, availability of
resources in terms of capital and labour, attitude and behaviour of the owners of the organization etc.
Premises over which an enterprise has absolutely no control are uncontrollable premises. Some
of the examples of uncontrollable factors are strikes, wars, natural calamities, emergency, legislation, etc

49
3. Deciding the planning period
Once upper-level managers have selected the basic long term goals and the planning premises,
the next task is to decide the period of the plan. Businesses vary considerably in their planning periods.
In some instances plans are made for a year only while in others they span decades. In each case,
however, there is always some logic in selecting a particular time range for planning. Companies
generally base their period on a future that can reasonably be anticipated. Other factors, which influence
the choice of a period are as follows: (a) lead time in development and commercialization of a new
product, (b) time required to recover capital investments or the pay-back period; and (c) length of
commitments already made.
(a) Lead time in development and commercialization of a new product
For example, a heavy engineering company planning to start a new project should have a
planning period of, say, five years with one or two years for conception, engineering and development
and as many more years for production and sales. On the contrary, a small manufacturer of spare parts
who can commercialize his idea in a year or so need make annual plans only.
(b) Time required to recovering capital investments or the pay-back period
These are the number of years over which the investment outlay will be recovered or paid back
from the cash inflow if the estimates turn out to be correct. If a machine costs Rs.10 lakhs and generates
cash inflow of Rs. 2 lakhs a year, it has a pay-back period of five years. Therefore, the plan should also
be for at least five years.
(c) Length of commitments already made
The plan period should, as far as possible, be long enough to enable the fulfillment of
commitments already made. For example, if a company has agreed to supply goods to the buyers for
five years or has agreed to work out mines for ten years it need also plan for the same period to fulfil its
commitments. However, if the length of commitment can somehow be reduced, the plan period can also
be reduced. Thus, if the company can grant sub-lease of its mines to other parties, then it can reduce its
plan period also.

4. Finding Alternative Courses of Action

The fourth step in planning is to search for and examining alternative courses of action.
Generally, there are alternative ways of achieving the same goals. For example, in order to increase
sales, an enterprise may launch advertising campaign or reduce prices or increase the quality of
products. Therefore, alternative course of action should be determined. This requires imagination,
foresight and ingenuity. In determining alternatives the critical or limiting factors must be kept in view.

50
5 Evaluating and Selecting a Course of Action
Having sought alternative courses, the fifth step is to evaluate them in the light of the premises
and goals and to select the best course or courses of action. Alternative courses of action can be
evaluated against the criteria of cost, risks, benefit and organizational facilities. The strong and weak
points of every alternative should be analyzed carefully. This is done with the help of quantitative
techniques and operations research.
6 Developing Derivative Plans
Once the plan has been formulated, its broad goals must be translated into day-to-day operations
of the organization. Middle and lower-level managers must draw up the appropriate plans, programmes
and budgets for their sub-units. These are known as derivative plans. In developing these derivative
plans, lower-level managers take steps similar to those taken by upper-level managers-selecting realistic
goals, assessing their sub-units’ particular strengths and weaknesses and analyzing those parts of the
environment that can affect them.
7. Measuring and controlling the Progress
Obviously, it is foolish to let a plan run its course without monitoring its progress. Hence the
process of controlling is a critical part of any plan. Managers need to check the progress of their plans so
that they can (a) take whatever remedial action is necessary to make the plan work, or (b) change the
original plan if it is unrealistic.
2.6. Types of Planning (Hierarchy of Planning)
From the viewpoint of scope and span of time, planning can be classified as under.
Types of Planning

Scope Span of time

Corporate Divisional/Departmental Sectional/Group

planning planning planning

Long-term Mid-term Short-term

planning planning planning

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i) Corporate Planning
Planning for the company as a whole is known as corporate planning. It lays down objectives,
strategies and policies for the entire organization. The purpose of corporate planning is to determine the
long-term goals of an enterprise and generate plans to achieve these goals keeping in view the probable
changes in its environment. It is proactive planning as it provides for future contingencies. It is less
detailed and specific than sectional and divisional planning. It is designed to steer successfully the
enterprise through various contingencies. It is done at the top-level management. It is very broad and
general. For example, increasing the company’s market share by ten percent in next five years,
becoming a technological leader in industry, earning a 25% rate of return on investment and so on.
ii) Departmental or Divisional Planning
It includes the plans formulated for various departments or divisions of an enterprise. It
determines the scope and activities of a particular department. For example, sales budget, production
budget, finance budget are departmental plans.
In a multi-product company there may be several product divisions, for example, sugar division,
textile division chemical division etc… each division formulates its overall plan by integrating all
sectional plans relating to that division. For instance, sales plan is a synthesis of advertising, sales
promotion, pricing, channel of distribution and product plans. Departmental plans are formulated at the
middle level of management and approved by the top management. These plans are also known as
functional plans because every department or division is concerned with one particular major function
of business. Such planning is segmental and reactive in nature.
iii) Group or Sectional Planning
Group or sectional planning refers to planning for specific groups or sections within a
department or division. Such plans are prepared to implement departmental or divisional plans. For
example, the advertising section may prepare a sectional plan to execute the sales plan of the company.
Similarly, the purchase section may prepare a purchase planto attain the goals of the production
department. Such planning is also known as Unit planning. The focus is on day-to-day work and on
meeting schedules and targets. It is action – oriented. Sectional plans are formulated by operating level
of management and it have to be approved by higher authorities.
iv) Long-range planning
It is also known as Strategic planning. It covers a long period of time say 5,10 or more years in
future. It takes into account the forecasted changes in the environment over the long-term. It provides
the overall targets towards which all activities of the organization are to be directed. It results in long-
term commitment of resources. It involves a great deal of uncertainty because the period involved is

52
several years. It tries to match the resources of the organization (micro aspect) with the environmental
threats and opportunities (macro aspect). A long-term strategic plan takes a macro view of the
organization. It provides direction for the growth of the enterprise. The primary aim of strategic
planning is to enable the enterprise to affect rather than accept the future.
v) Medium – term planning
It is also known as intermediate planning or tactical planning. Such planning covers a period
between 1 to 5 years. It more detailed and specific than long range strategic planning. It is designed to
implement strategic plans by coordinating the work of different departments. Such planning is
coordinative. A tactical plan is drawn up for short term moves and man oeuvres within the broader and
more stable strategic plans. For example, a tactical plan may be drawn up to meet a sudden slump in
demand, shortage of power etc… Tactical plans are less detailed than operational plans.
vi) Operational Planning
Operational plans are prepared for a period up to one year. They are generally specific and
detailed. These plans provide form and content to long-term plans. Such plans are prepared on the basis
of strategic and tactical plans. The main purpose of operational planning is to maximize efficiency in
day-to-day operations and ensure uniformity of action. For example, repairs and maintenance plan,
purchase plan, product plan and so on.
Difference between Strategic and Tactical Planning
Strategic planning Tactical planning
1 .It decides the major goals and 1. It decides the detailed use of
policies of allocation of resources to resources for achieving each goal.
achieve these goals.
2. It is done at higher levels of 1. It is done at lower levels of
management management.
3. It is long-term. 3. It is short-term.
4. It is generally based on long-term 4. It is generally based on the past
forecasts about technology, political performance of the organization and
Environment, etc. and is more is less uncertain.
uncertain.
5. It is less detailed because it is not 5. It is more detailed because it is involved
involved with the day-to-day with the day-to-day operations of the
operations of the organisation. organisation.

2.7. Essentials of sound plan/Making an effective planning

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 A good plan should contain the following features
 It should be based on clearly defined objectives.
 It must be simple and easily understandable.
 It should be flexible or adaptable to changing conditions.
 It must be balanced in all respects and should be reasonably comprehensive.
 It should provide standards for the evaluation of performance and actions.
 It should be economical. I.e., permit optimum use of available resources before creating new
authorities and new resources.
 It should be practicable or action oriented.
 It should be prepared with the consultation of concerned persons.
 Different plan must be properly integrated and harmonized with one another.
 It should provide for proper analysis and classification of actions.

2.8. Types of Plans

In a business enterprise, we find or hear of a number of plans; which might seem to be different
in their contents and application. However, a careful analysis of various plans would reveal them to be
closely connected and forming a sort of structure. Depending on their use, management plans may be
classified into two broad categories.
Types of Plans

Standing Plan (or) Single Use Plan (or)

Multi – use plan Ad hoc Plan
Missions/purposes Programme
Objectives/Goals Budgets
Strategies Schedules
Policies Projects
Rules Methods
Procedures

54
I. Standing Plan
a) Mission or Purposes
Mission is a statement that defines the role that an organization plays in the society.
It represents the overall philosophy of an organization. It indicates the end which is to be achieved over
the whole life of an organization or at least over a long period. The term mission is generally used in non
– business organizations like a college, university, a religious trust, a club, a government etc… For
example, the mission of the Government of India might be eradication of poverty; the mission of a
university might be imparting higher level education to the largest possible number of people of society
and encouraging research maximally; and the mission of a manufacturing enterprise might be producing
high quality goods for the common men of society a the most affordable prices and so on.
b) Objectives or Goals
Objectives are the results which management wants to achieve through the making and
implementation of a plan. These, in fact, are the goals towards which a plan is directed. Objectives
provide a sense of direction to the thinking process of the planner, and to the action process of the
operators of the plan. Organization objectives may be classified into two categories. They are Internal
objectives and External objectives. An internal objective relates to maximize the company’s profit, high
liquidity, best services to employees, high return to shareholders etc… While external objectives relate
to the services to the customers and their satisfaction. It is rightly pointed out that the management
process begins with setting the organizational objectives. While establishing the organizational
objectives, the following eight areas should be taken into account without fail
 Market standing
 Productivity
 Physical and financial resources
 Profitability
 Innovation
 Manager performance and development
 Work performance and attitude
 Public and social responsibility.
In addition to that the following two things also very essential for formulating objectives.
 The mission of the enterprise, and
 The resources and limitations of the enterprise.
In any case, objectives must be rational and must contribute to the mission of the enterprise.

55
c) Strategies
It is a special type of plan prepared for meeting the challenges posed by the activities of
competitors and other environmental forces. It is an action to meet the specific demands of the
situation. The concept of strategy is borrowed from military organizations. In the military plans are
changed and modified very often for the purpose of meeting the movement of enemy. Similarly, the
business enterprises, managers bring the changes in corporate plans and policies in accordance with the
tactics adopted by competitors. The nature and form of strategy is not static, but it is a dynamic one.
d) Policies
Since all managers in the organisation - do planning from the highest to the lowest. It
is imperative that planning by managers at lower levels must be within the limits of planning done at
upper levels of management. For achieving this purpose precisely; policies are formulated by the top
management.
A policy might be defined as “a statement of guidance and instruction; which defines and
confines the area of discretion of subordinates, in matters of decision-making”.
For example, A policy of the marketing manager to extend credit to customers for a maximum
period of 30 days; authorized salespersons to extend credit to their customers for any period say, a week,
a fortnight, or 20 or 25 days; but in no case for a period beyond 30 days; which amounts to the boundary
line of policy of credit to customers.
e) Rules
A rule is a specific and detailed guide to action. It is also a standing plan, as they prescribe in
advance what is to be done or not to be done in a specific situation. The top management derives
rules. Rules must be strictly followed. Rules are definite and they do not leave any scope for discretion
on the part of the subordinates. Rules for dealing with unauthorized absence from duty, “No smoking in
the factory”, and “stop when the red light is on” are some examples of rules.
f) Procedures
A procedure, as a type of management plan, specifies the manner of handling an
organizational activity - in terms of various steps to be undertaken. I.e., a procedure is a chronological
sequence of steps to be undertaken to enforce a policy and to achieve an organizational objectives. The
essence of a procedure is the chronological (i.e. in order of time) sequence of actions. For example, there
might be specified procedures for handling inward mail; procedures for executing orders of customers;
procedure for employees to proceed on to leave and so on, for various other organizational activities

56
II) Single Use plan
a) Programmes
A programme is a plan of action - indicating what work is to be done to carry out a particular
objective. For example to popularize the products there-is a need for an advertising programme. Again,
to improve the skills of personnel in performing their jobs; there is required a 'training and development'
programme. For undertaking the manufacturing activities, there is a production programme, and so on.
b) Budgets
A budget is a plan, which states expected results of a given future period in numerical terms.
It is a plan of action or blueprint designed to achieve a specific goal. It may be expressed in time,
money, or other measurable units. It is a projection defining the anticipated costs and results and the
allocation of resources. It may reflect capital outlay, cash flow, production and sales targets. It expresses
organizational objectives in financial and physical units. For example, man-hours, machine hours,
sales-targets, expense estimates in money terms or revenue estimates in money terms etc.
There are various types budgets according to their nature. These are
 Variable Budgets or Flexible Budget
These budgets vary according to the organization output.
 Programme Budget
In this budget, the agency identifies goals, develops detailed programmes to meet the
goals, and estimates the cost of each programme.
 Zero – base budget
It is a combination of programme and variable budget.
c) Schedules
A schedule is a time – table of work. It specifies the date when a task is to begin and the time
needed to complete each task. The starting and completion date for each part of the programme are
specified in the time schedule.
Three main elements are involved in planning a schedule.
 Identify activities or tasks,
 Determine their sequence, and
 Specify starting and finishing date for each activity as well as for the sequence as a whole.

57
d) Projects
A project is a complex scheme for the investment of resources, which can be analyzed and
evaluated as an independent unit. The main features of a project are as follows.
 It is a non – recurring plan
 It has a specific mission or objective
 It involves time bound plan with a long time.
 It has a clear termination point.
e) Methods
Methods specify the detailed and best manner of perform a particular step, comprised in a
procedure. Methods are formalized and standardized ways of accomplishing repetitive and routine jobs.
They are designed to keep operations running on planned and desired lines, to prevent confusion and
adhocism and to ensure economy and efficiency. Methods provide detailed and specific guidance for
day – to – day operations. Methods are helpful in the simplification, standardization and systematization
of work. They serve as uniform norms to guide and control operations and performance. Standard
methods represent the best way of performing jobs.
Summary of Various Plans
Name of Plan Definition Nature Example
Goal or target to be Increase sales by 10 per
Objective Basis of all plans
achieved cent
General statement or Employees are to be
Boundary within which
Policy understanding to guide promoted on the basis
decisions are to be made
thinking of seniority
Action plan to face Combative advertising
Relates the organisation to
Strategy environmental to face price cuts by
its environment
uncertainties competitors
Manner in which
Procedure activities are to be Sequence of steps Purchase procedure
performed
States what should or
Rigid plan, no scope for No smoking in the
Rule should not be done in a
discretion factory
given situation
Combination plan for
States activities and Installation of a
Programme goal achievement, non-
resources to be undertaken computer
repetitive
Complete installation
Specifies priority of work of computer within 3
Schedule Time-table for activities
and time for each activity months w.e.f. Jan,
1989.
Statement of expected
Quantitative and time Produce 10,000 tonnes
Budget results and resources to
bound plan of action of sugar next year
be used
Cluster of interrelated Scheme for deployment of Construction of a
Project
activities-a separate unit resources flyover

58
 (a) Differences between policies and strategies.
Sl.
Policies Strategies
No
Guides to thinking and actions of those who Provide direction in which human and
1
make decisions physical resources will be deployed
Guidelines for making decisions in
2 Contingent decisions
repetitive situations
Taken for problems about which facts are
Taken for problems where alternatives
3 known. Only time of occurrence is not
cannot be analysed in advance.
specific
Implementation of strategy cannot be
4 Implementation of policy can be delegated delegated as it requires last-minute executive
decision
Non-repetitive plans, may need frequent
5 Standing plan or long lasting
revision
Not based specially on the moves of Formulated in the light of competitors’
6
competitors moves

(b) Differences between policy and procedure.

Sl.
Policies Procedures
No
General guides to thinking and decision-
1 Operational guides to action
making
Expressions of management’s attitude
2 Systematic ways of handling routine events
towards certain issues
Leave room for executive discretion and
3 Leave little room for reflection and deviation
judgement
4 Lay down broad area Provide route through the area
Provide bridge between purpose and Provide bridge between activities and
5
performance outcomes
Provide norms for thinking and discretion. Detailed and rigid. More specific. Provide
6
Broad, general and flexible manner of doing something
7 Form part of strategies Serve as tactical tools
8 Formulated mainly by top management Laid down at middle and lower levels
Specifies chronological sequence of steps.
9 Derived from objectives of the organisation
Derived from policies

59
 (c) Difference between Policies and Rules
Sl.
Policies Rules
No
1 A general statement A most specific statement
2 Guide to decision-making Guide to behaviour
3 Lays down management attitude Indicates what should or should not be done
4 Flexible, may have some exceptions Rigid, no exceptations or deviations
5 Provides discretion during implementation Provide no scope for discretion

(d) Distinction between Objectives and Policies

Sl.
Objectives Policies
No
Guidelines which facilitate the
Ends towards which all activities of an
1 accomplishment of predetermined
organisation are directed
objectives
2 Determine what is to be done Determine how the work is to be done
Means by which objectives are to be
3 End-points of planning
achieved
4 Determined by top management Formulated at top and middle levels
One objective may require more than one Every policy related to one particular
5
policy objective
6 Derived from philosophy of business Derived from objectives
7 Indicate the destination Provide the route
8 Basic to the very existence of an organisation Not basic to existence

2.9. Objectives
2.9.1. Meaning
Every organization exists to achieve some purposes, which is called its objectives. Objectives are
the results which management wants to achieve through the making and implementation of a
plan.
2.9.2. Definition

“Objectives are goals established to guide the efforts of the

Company and each of its components”.

- Luis Allen

60
2.9.3. Nature/Characteristics of Objectives

1.An organization has multiple objectives

Objectives are numerous. Even the mission and broad major enterprise objectives are normally
multiple. For example, profits, survival, growth, service to society etc… This multiplicity of objectives
creates the problem of fixing priorities among different objectives and of harmonizing them.
2.Objectives have time Span
An organization must have short term, middle term and long-term objectives. Short term and
middle term objectives are means of achieving long term objectives. All these objectives need to be
integrated so that they reinforce each other.
3 Objectives are either tangible or intangible
Some of the objectives are tangible such as areas of market standing, productivity, and physical
and financial resources are quantifiable values available. Other areas of objectives are not readily
quantifiable and are completely intangible which are qualitative natures, such as manager’s
performance, worker’s morale, public responsibility etc…
4.objectives form a hierarchy
Objectives form a hierarchy, ranging from the broad aim to specific individual objectives.
Generally, a top-level management of an organization assigning a part of a mission to a particular
department. Then the mission is subdivided into few parts and assigned among sections and individuals.
This process creates hierarchy of objectives. Objectives at all levels in the organization are interrelated
and form a network.

61
 1

1. Socio
economic
purpose

Top – lev
2. Mission managem

3. Overall objectives of the

organization (long-range,
strategic)

4. More specific overall objectives (Ex.., in

key result areas) KRA.

5. Division objectives
Middle – l
managem

6. Department and unit objectives

7. Individual objectives Lower-le

a) Performance b.) Personal development objectives
managem

HierarchyHierarchy of Objectives
of Objectives Organization Hierarchy
Organization

Relationship of
Objectives and the Organizational Hierarchy

62
 There are two types of approaches in which the hierarchy can be explained.
 Top – down approach
 Bottom – up approach.
In the top – down approach, the total organization is directed through corporate objective
provided by the top level of management. In the bottom – up approach, the top-level management
needs to have information from lower level in the form of objectives.

2.9.4. Management by Objectives (MBO)

2.9.4.1. Meaning of MBO
MBO is both philosophy and a technique of management. It represents a rational and systematic
approach to management wherein measurable goals are set up in consultation with subordinate managers
and the contribution of each individual is judged in terms of such goals.
2.9.4.2. Definition of MBO

“MBO is a process whereby the superior and the subordinate managers of an

enterprise jointly identify its common goals, define each individual’s major areas of
responsibility in terms of the results expected of him, and use these measures as
guides for operating the unit and assessing the contribution of each of its members.”
- George Odiorne
2.9.4.3. Objectives of MBO
Management by Objectives is intended primarily:
1. To measure and judge performance.
2. To relate individual performance to organizational goals;
3. To clarify both the job to be done and the expectations of accomplishment.
4. To foster the increasing competence and growth of the subordinates.
5. To serve as a basis for judgements about salary and promotion
6. To stimulate the subordinates’ motivation; and
7. To serve as a device for organization control and integration.
8. To Serve as a device for organizational control and integration.

2.9.4.4. Features of MBO

1. MBO focuses attention on what must be accomplished (goals) rather than on how it is to be
accomplished (methods). It is a goal-oriented rather than work-oriented approach.

63
 2. MBO involves participation of subordinate managers in the goal setting process. It requires all
key personnel to contribute maximum to achieve the overall objectives.
3. MBO stresses measurable and verifiable goals in key result areas. It attempts to blend and
balance the goals of all key personnel.
4. MBO is a dynamic system, which seeks to integrate the company’s need to achieve its objectives
with the manager’s need to contribute and develop himself.
5. MBO is an overall philosophy of management that allows management to attain maximum
results from available resources. It is not a set of rules or procedures but a way of thinking about
managing.
6. MBO has an operational thrust involving linkage between organizational goals and individual
goals.
7. MBO is a continuous process of goal setting, periodic appraisals and modification of goals and
performance.
8. It sets an evaluative mechanism by which the contribution of each individual can be measured.
2.9.4.5. Steps in MBO Process
1. Preliminary goal-setting
The first phase of MBO is the clarification of the objectives which the organization is to attain. The
long-term overall goals of the enterprise are laid down in the key result areas. These goals are laid down
keeping in view the internal and external environments of the organization. These goals are preliminary
and tentative subject to modification as the full range of verifiable objectives is evolved by the
organization. While the strategic objectives may be verbal, operational goals must be measurable so as
to serve definite yardsticks of goals accomplishment.
2. Fixing Key Result Areas (KRA)
Key Result Areas (KRAs) are identified on the basis of organizational objectives and planning
premises. These are the areas reference to which organizational health can be measured. Key result areas
are arranged on the priority basis. Some examples of KRAs are
 Profitability
 Market standing
 Innovation
 Productivity
 Market performance
 Public responsibility etc…

64
 These areas may vary for different organization. KRAs indicate the strength of an organization.
2. Setting Subordinates’ Objectives
The organizational objectives are achieved through individuals. Therefore, each individual must
know what he is expected to achieve. In setting objectives for subordinates, the organizational goals,
subordinates’ ability and resources available to him should be duly considered. Subordinates’ objectives
must be set in consultation with the individuals concerned. The allocation of resources should also be
made in consultation with subordinates. There must be proper matching of goals and resources.

Organizational
Organizational
Objectives
Objectives
\Recycling

Key Result Areas

Superior’s objectives

Superior’s Subordinates
Available
recommendation for sub statement of
resources
ordinates objective objectives

Subordinates
agreed objectives

Subordinates ongoing
performance

Periodic review
and appraisal

New inputs Corrective measures and

superior’s assistance

Final performance
by subordinate

65
PROCESS OF MBO

66
3. Recycling Objectives
Under MBO goals setting is not direction from the top management only. Rather it is a two-way
process in which the superior suggests a goal that is acceptable to the subordinate. Goal setting is a joint
and interactive process. A network of objectives is created so that every lower level objective
contributes effectively to the achievement of the objectives next to it.
4. Action Planning
Once goals are established at all levels, action programmes are developed for their accomplishment.
Detailed procedures are set up for their accomplishment. Detailed procedures are set up for the
utilization of resources and for achievement for pre-determined targets. Action planning may call for
revision of existing organization structure. The organization charts, manuals and job descriptions should
be suitably amended. The authority and responsibility of each job and its relationship with other jobs
should be clearly defined. Checkpoints should be established for evaluation of results in key areas.
5. Periodic Performance Reviews
At specified intervals, progress towards the accomplishment of goals is reviewed in consultation
with subordinates. Such reviews are made to identify shortcomings and to take timely steps to improve
results. Feedback from these reviews is provided to each individual to facilitate self-regulation and
control. Progress towards the goal is discussed and potential for improvement is identified. In such
reviews, the superior serves as a counselor and guide to the subordinates.
6. Final Appraisal
A thorough evaluation of performance is made at the end of the year. Achievements are analyzed in
the light of established goals and standards. If a subordinate does not achieve their objectives, then the
superior should identify what are the problems and how these problems can be overcome. The main
purpose of the appraisal is to find out the shortcomings in achieving objectives and also to remove them
promptly. Rewards are decided on the basis of such appraisal.
2.9.4.6. Advantages and Disadvantages Of MBO
Sl.No Advantages of MBO Disadvantages of MBO
1 Improved managerial performance. Difficulty in goal setting.
2 Concentration of profit making activities. Time consuming
3 Better delegation. More paper work.
4 Improved communication Pressure on people
5 Improved morale and sense of purpose Leadership problems
6 More effective development of executives.
7 Early recognition of management potential

67
2.10. Management by Exception (MBE)
One of the most important ways of tailoring controls for efficiency and effectiveness is to make
sure that they are designed to point out exception. In other words, by concentrating on exceptions from
planned performance, controls based on the time-honored exception principle to allow managers to
detect those places where their attention is required and should be given. This implies the use of
management by exception particularly in controlling aspect. Management by exception is a system of
identification and communication the signals to the manager when his attention is needed.
Management by exception has six basic ingredients: Measurement, projection, selection,
observation, comparison and decision-making.
i) Measurement assigns values to past and present performances. This is necessary because
without measurement of some kind, it would be impossible to identify an exception.
ii) Project analyses those measurements that are meaningful to organizational objectives and
extends them into future expectations.
iii) Selection involves the criteria which management will use to follow progress towards
organizational objectives.
iv) Observation state of management by exception involves measurement of current performance
so that managers are aware of the current state of affairs in the organization.
v) Comparison stage makes comparison of actual and planned performances and identifies the
exceptions that require attention and reports the variances to the management.
vi) Decision-making prescribes the action that must be taken in order to bring performance back into
control or to adjust expectations to reflect changing conditions or to exploit opportunity.
However, the major difference lies in the fact that the superior’s attention is drawn in the case of
exceptional differences between planned performance and actual performance. In other cases,
subordinate manager takes decisions. However, what is exceptional requires the completion of whole
process.

Benefits of Management by Exception

Management by Exception saves executives time because they apply themselves on fewer
problems, which are important. Other details of the problems are left to the subordinates.
Instead of spreading managerial attention across all sorts of problems, it is placed selectively
where and when it is needed. Thus it ensures better utilization of managerial talents.
MBE facilitates better delegation of authority, increases span of management and consequently
provides better opportunities of self-motivational personnel in the organization.

68
Management by exception makes better use of knowledge of trends, history and available business data.
It forces managers to review past history and to study related business data because these are the
foundations upon which standards are derived and from which exceptions are noted.
It helps in identification of crises at the moment in which any exceptional deviation occurs; the
attention of higher-level manager is drawn. In this way, it alerts management about their opportunities
and difficulties.
Management by exception provides qualitative and quantitative yardsticks for judging situations
and situations and people.
It enhances the degree of communication between different segments of an organization. With
its focus on results, it seeks to relate causes, regardless of their place in the organization, with overall
organizational results. As such it encourages exchange of information between functions and also
between a function and cost centre or profit centre to which it reports.

69
 UNIT – III
ORGANISING

3.1. Meaning of organization

It refers to coordinate human resources with other resources such as material, machine,
money etc… Once managers have established objectives and developed plans to achieve them, they
must design and develop a human organization that will be able to carry out those plans successfully.
Sub functions of organizing functions are as follows: Functionalisation, divisionalisation,
departmentation, delegation, decentralization, activity analysis, task allocation

3.2. Definition
“Organization refers to the structure, which results from identifying and
grouping work, defining and delegating responsibility and authority, and
establishing relationships.”
- Louis Allen
“An organization is a social unit or human grouping, deliberately
structured for the purpose of attaining specific goals”.
- Amitai Etzioni
For example, corporation, Armies, Schools, Hospitals, etc… are the organizations. But tribes,
Ethnic, and friendship group and families are not organization because they do not involve any
significant amount of conscious planning or deliberate structuring.

3.3. Nature of Organization/Characteristics of Organization

The main characteristics of organization are as follows:
1. Common purpose
Every organization exits to accomplish some common goals. The structure must reflect these
objectives as enterprise activities are derived from them. It is bound by common purpose.

2. Division of labour
The total work of an organisation is divided into function and sub-functions. This is necessary to
avoid the waste of time, energy and resources, which arises when people have to constantly change from
one work to another. It also provides benefits of specialisation.

70
3. Authority structure
There is an arrangement of positions into a graded series. The authority of every position is
defined. It is subordinate to the position above it and superior to the one below it. This chain of
superior-sub-ordinate relationships is known as chain of command.
4. People
An organisation is basically a group of persons. Therefore, activity groupings and authority
provision must take into account the limitations and customs of people. People constitute the dynamic
human element of an organisation.
5. Communication
Every organisation has its own channels of communication. Such channels are necessary for
mutual understanding and co-operation among the members of an organisation.
6. Co-Ordination
There is a mechanism for coordinating different activities and parts of an organisation so that it
functions as an integrated whole. Co-operative effort is a basic feature of organisation.
7. Environment
As organisation functions in an environment comprising economic, social, political and legal
factors. Therefore, the structure must be designed to work efficiently in a changing environment. It
cannot be static or mechanistic.
8. Rules and Regulations
Every organisation has some rules and regulations for orderly functioning of people. These rules
and regulations may be in writing or implied from customary behaviour.

3.4.Principles of Organizing

In order to develop a sound and efficient organisation structure, there is need to follow certain
principles. In the words of E.F.L. Brech, if there is to be a systematic approach to the formulation of
organisation structure, there ought to be a body of accepted principles. These principles are as follows.

1.Objectives

The objectives of the enterprise influence the organisation structure and hence the objectives of
the enterprise should first be clearly defined. Then every part of the organisation should be geared to the
achievement of these objectives.

71
2. Specialisation

Effective organisation must promote specialisation. The activities of the enterprise should be
divided according to functions and assigned to persons according to their specialisation.

3. Span of control

As there is a limit to the number of persons that can be supervised effectively by one boss, the
span of control should be as far as possible, the minimum. That means, an executive should be asked to
supervise a reasonable number of subordinates only say six.

4. Exception

As the executives at the higher levels have limited time, only exceptionally complex problems
should be referred to them and the subordinates at lower levels should deal with routine matters. This
will enable the executives at higher levels to devote time to more important and crucial issues.

5. Scalar principle

This principle is sometimes known as the chain of command. The line of authority from the
chief executive at the top to the first-line supervisor at the bottom must be clearly defined.

6. Unit of command

Each subordinate should have only one superior whose command he has to obey. Dual
subordination must be avoided, for it causes uneasiness, disorder, indiscipline and undermining of
authority.

7. Delegation

Proper authority should be delegated at the lower levels of organisation also. The authority
delegated should be equal to responsibility, i.e. each manager should have enough authority to
accomplish the task assigned to him.

8. Responsibility

The superior should be held responsible for the acts of his subordinates. No superior should be
allowed to avoid responsibility by delegating authority to his subordinates.

72
9. Authority

The authority is the tool by which a manger is able to accomplish the desired objective. Hence,
the authority of each manger must be clearly defined. Further, the authority should be equal to
responsibility.

10. Efficiency

The organisation structure should enable the enterprise to function efficiently and accomplish its
objectives with the lowest possible cost.

11. Simplicity

The organisation structure should be as simple as possible the organisation levels should, as far
as possible, be minimum. A large number of levels of organisation means difficulty of effective
communication and coordination.

12. Flexibility

The organisation should be flexible, should be adaptable to changing circumstances and permit
expansion and replacement without dislocation and disruption of the basic design.

13. Balance

There should be a reasonable balance in the size of various departments, between centralization
and decentralization, between the principle of span of control and the short chain of command, and
among all types of factors as human, technical and financial.

14. Unity of Direction

There should be one objective and one plan for a group of activities having the same objective.
Unity of direction facilitates unification and coordination of activities at various levels.

15. Personal ability

As people constitute an organisation, there is need for proper selection, placement and training of
staff. Further, the organisation structure must ensure optimum use of human resources and encourage
management development programmes.

73
3.5. Organization Process

The term organization is used in two different senses. In the first sense it is used to denote the
process of organizing.

In the second sense it is used to denote the result of that process, namely, the organization
structure (departmentation).

Using it in the first sense, organization is the process of defining and grouping the activities of
the enterprise and establishing the authority relationships among them. In performing the organizing
function, the manager differentiates and integrates the activities of his organization. By differentiation is
meant the process of departmentalization or segmentation of activities on the basis of some
homogeneity. Integration is the process of achieving unity of effort among the various departments
(segments or subsystems).

Organization procedure consists of six steps.

1) Consideration of objectives

The first step in organizing is to know the objectives of the enterprise. Objectives determine the
various activities, which need to be performed, and the type of organisation, which needs to be built for
this purpose. Management writers, such as Alfred D. Chandler refer to this phenomenon as one in
which “structure follows strategy.” For example, the structure required for an army is different from
the structure required for a business enterprise. In view of this, consideration of objectives is the first
step in the process of organization.

2) Grouping of activities into departments

After the consideration of objectives, the next step is to identify the activities necessary to
achieve them and to group the closely related and similar activities into divisions and departments. For
example, the activities of a manufacturing concern may be grouped into such departments as production,
marketing, financing and personnel. In addition, the activities of each department may be further
classified and placed under the charge of different sections of that department. For example, in the
production department, separate sections may be created for research, industrial engineering, etc. The
topic of departmentalization has been dealt with in a separate section in this chapter.

74
3) Deciding which departments will be key departments

Key departments are those, which are rendering key activities, i.e. activities essential for the
fulfillment of goals. Such key departments demand key attention. Other departments exist merely to
serve them. Experience suggests that where key departments are not formally identified, the attention of
top management is focused on the minor issues raised by vocal mangers. This is known as the “decibel
system” of management. The key departments should be placed directly under higher management.

Which department needs to be emphasized how much will depend, of course, on the company's
objectives and the way it seeks to be distinctive. For example, a company, which believes that
advertising is a primary key to success will set up a separate advertising department, that reports directly
to the president. But another company, which considers it much less important, may only create
separate section for it under its sales department. Similarly, product development, which is treated as a
key department in all chemical and pharmaceutical companies, with those in charge reporting directly to
the president, may be treated only as a section of the production department in textile companies. The
importance of an activity may also grow with times. Thus, personnel management, which was hitherto
considered less important, is now treated as important activity and has risen in organizational status.

4) Determining levels of which various types of decision are to be made

After deciding the relative importance of various departments, the levels at which various major
and minor decisions are to be made must be determined. Each firm must decide for it as to how much
decentralization of authority and responsibility it wants to have. Extreme decentralization may lead to
loss of control and effective coordination as a result of which the firm as a whole may fail to achieve its
overall objectives. Extreme centralization, on the other hand, may lead to wrong decision sat wrong
times and complete breakdown of the morale of employees

5) Determining the span of management

The next step to be taken in designing a structure is to determine the number of subordinates who
should report directly to each executive. The narrower the span, the taller would be the structure with
several levels of management. This will complicate communication and increase the payroll. For these
reasons, a flat structure is generally desirable

75
6) Setting up a coordination mechanism

Emphasizing the importance of coordination in an organization, Peter Drucker says that an

organization is like a tune. It is not constituted of individual sounds but of the relation between them.
As individuals and departments carry out their specialized activities, the overall goals of the
organization may become submerged or conflicts among organization members may develop. For
example, production mangers in a manufacturing company may press for a standardized product line to
hold down costs, when the larger interests of the company may be best served by a diversified product
line. In a university, various schools or departments may begin to compete for limited funds

3.6. Formal and Informal Organizations

3.6.1. Formal organization
A formal organization typically consists of a classical hierarchical structure in which positions;
responsibility, authority, accountability and the line of command are clearly defined and established. It
is a system of well-defined jobs with a prescribed pattern of communication, coordination and
delegation of authority.
According to Allen, “the formal organization is a system of well defined jobs, each bearing a
definite measure of authority, responsibility, and accountability”.
Formal organization must be flexible. Each and every person is assigned the duties and given the
required amount of authority and responsibility to carryout the job. It creates co-ordination between
workers to achieve common goal. The inter relationship of staff members can be shown in the
organization chart and manuals under formal organization.
3.6.1.1. Characteristics of formal organization
 It is flexible and properly planned.
 It is based on principle of division of labour and efficiency in operations.
 It concentrates more on the performance of jobs and not on the individuals performing the
jobs.
 Organization charts are usually drawn.
 Coordination among members and their control are well specified through processes,
procedures, rules etc…
 The responsibility and accountability at all levels of organization should be clearly defined.
 Unity of command is normally maintained.

76
3.6.1.2. Advantages of formal organization
 Since the definite boundaries of each worker are clearly defined, the conflict among the workers
is automatically reduced.
 Overlapping of responsibility is easily avoided.
 More stable organization can be ensured. It makes the organization less dependent on one man.
 A sense of security arises from classification of the task.
 It motivates the employees.

3.6.2. Informal organization

It refers to the pattern of activities, interactions and human relationships, which emerge
spontaneously due to social and psychological forces operating at the work place. It arises naturally on
the basis of friendship or some common interest, which may or may not be related with work. It is an
unintended and non-planned network of unofficial and social patterns of human relationships. Informal
organization represents the pattern of interpersonal and intergroup relations that develop within the
formal organization. For example, the typists working in different department may form an informal
group due to similarity of work. Common language, common habits, common hobby may also lead to
informal groups. It is an unofficial and social pattern of human interactions.

According to Chester Barnard, “informal organization is joint personal activity without

conscious common purpose through contributing to joint results”

3.6.2.1. Characteristics of informal organization

 It arises without any external cause ie. Voluntarily. It is a natural outcome at the work place.
 It is created on the basis of some similarity among the members. The bases of similarity may be
age, sex, place of birth, caste, religion, likings/dislikings etc.
 Informal organization has no place in the organization chart.
 It is one of the parts of total organization.
 It has no structure and definiteness to the informal organization.
 A person may become member of several informal organizations at the same time.
 The rules and traditions of informal organization are not written but are commonly followed.

77
3.6.2.2. Advantages of informal organization
 Since informal organization gives satisfaction to the workers, it motivates workers and also
maintains the stability of the work.
 It fills up the gaps and deficiency of the formal organization.
 It fills up the gaps among the abilities of the managers.
 The presence of informal organization encourages the executives to plan the work correctly and
act accordingly.
 It is one of the useful channel of communication

3.6.2.3. Disadvantages of informal organization

 Informal organizations may function in ways that are counter productive. They may stand in the
way of organization achieving the objectives.
 It indirectly reduces the effort of management to promote greater productivity.
 It spreads rumour among the workers regarding the functioning of the organization
unnecessarily.
3.6.3.Difference between Formal and Informal organization
Sl.
Point of view Formal organization Informal Organization
No.
1 Origin It is created deliberately and It is created spontaneously and
consciously by the frames of the naturally
organization
2 Purpose It is created for achieving It is created by the members of
legitimate objectives of the the organization for social and
organization psychological satisfaction.
3 Nature Planned and official Unplanned and unofficial
4 Size It may quite large It may be small in size.
5 Nature of groups It may be stable and continue for It is quite unstable in nature
a very long period of time
6 Number of groups More Less
7 Structure Definite structure, mechanical and Structureless, impersonal and
rational emotional
8 Authority Authority flows from top to It may flows upward to
bottom downwards from or horizontally
9 Communication Communication normally flows Communications pass through
through the prescribed chain of the informal channels which do
command not have one single form
10 Control process Rigid rules and regulations Group norms and values.

78
3.7. Authority and Responsibility

3.7.1. Authority

In management, authority may be defined as the right to guide and direct the actions of others
and to secure from them responses, which are appropriate to the attainment of the goals of the
organization. It is the right to utilize organizational resources and to make decisions. Authority is the
right to decide and to direct others to perform certain duties in achieving organizational goals. It refers
to right to make decisions and to get the decisions carried out. It is the right to act. It is the relationship
between two individuals – one superior, another subordinate. The superior frames and transmits
decisions with the expectation that the subordinate will accept these. The subordinate executes such
decisions and they determine his conduct.

3.7.1.1. Definition

“Authority is the right to give orders and the power to exact obedience”.

- Henry Fayol

Authority is the power to command other to act or not to act in a manner

deemed by the possessor of the authority to further enterprise or departmental
purpose”.

Koontz & O’Donnell

"Authority may be defined as the power to make decision which guide the
actions of others".

- Herbert A. Simon

3.7.2. Responsibility

Responsibility always arises from the superior – subordinate relationship. The essence of
responsibilities is obligation. If a person is entrusted with any work, he should be held responsible for
the work that he completes. Responsibility is the obligation to do something. In other words,
responsibility is the obligation to perform the tasks, functions or assignments of the organization to
achieve certain results.

79
3.7.2.2. Definition

“Responsibility may be defined as the obligation of a subordinate, to whom

duty has been assigned to perform the duty.”

- Koontz & O'Donnel,

“Responsibility is the obligation of an individual to perform assigned duties

to the best of his ability under the direction of his executive leader.”

- R.C. Davis

Responsibility is the obligation of a subordinate to perform the duty as

required by his superior.

- Theo Haimann

3.7.3. Distinction between Authority and Responsibility

Distinction Authority Responsibility

Meaning Authority is a right vested in a Responsibility is a duty or

managerial position; which enable obligation owed by a
the manager to command subordinate to the superior,
subordinates from whom the former derives
authority – for the proper
discharge of the assigned job.

Nature It is primary It is secondary or conditional. It

is a corollary of authority; and
cannot exist independently.

80
 Flow Authority flows from top to bottom Responsibility follows a
via the management hierarchy reverse course. It proceeds in
an anti-hierarchical manner
from subordinate to superior.

Location It is formal and impersonal. It is It is personal in nature. It is

vested in managerial positions; and owed by Persons to their
not in managers in their personal superiors. It is not vested in
capacities. managerial positions.

Delegation It can be delegated by superiors to It cannot be delegated.

their subordinates for
organizational purposes.

Termination It granted to a manager can be It cannot be terminated; at

terminated by the superior. least for the acts for which a
person is already responsible
to his superior.

3.7.4. Power

Power is the ability to influence or to cause a person to perform an act. Power refers to the
ability or capacity to influence the behaviour or attitudes of other individuals. A superior’s power may
be considered as his ability to cause subordinates to do what the superior wishes them to do.

3.7.4. 1. Definition

Power is the probability that one actor within the relationship will be in a
position to carry out his own despite resistance.

- Max Weber

81
3.7.4. 2. Types of Power

John R.P. French and Bertram Ravan have identified five basic types of power. The first three
types such as reward, coercive, and legitimate power are associated with a manager’s position. The last
two - referent and expert power are part of person, not the position.

 Reward power: It arises from the ability of the people to grant rewards. The reward generally
includes salary increment, promotion, favourable job assignment, praise and recognition.

 Coercive power: It is based on the manager’s ability to punish for not complying with orders. It
includes demotions, fines and threats of suspension or termination.

 Legitimate power: it is normally arises from position, which is legitimate. The higher a
manager is in the hierarchy, the greater his legitimate power.

 Referent Power: It refers to the power enjoyed by same people because of their integrity,
charisma and popularity. A movie star or a military hero might posses such power.

 Expert Power: It is based on possessing valued knowledge or special skills. A manager who
possesses such knowledge or skill has power over others who do not. A famous doctors,
advocates and professionals enjoy such power.

3.7.4. 3. Distinction between Authority and Power

The objective of both authority and power is common, i.e., to influence the behaviour of others.
But there are following important differences between authority and power.

Sl.No AUTHORITY POWER

1. Right to do something Ability to do something
Derived from organization position – Derived from many sources –
2.
institutional. personal.
Always flows downward – can be Flows in all directions - cannot be
3.
delegated delegated
May be illegitimate or extra
4. Legitimate - resides in the position
constitutional
Narrow term - one source or subset of Broad concept - can achieve results
5.
power when authority fails
Visible from organization chart. It is
6. Not visible from organization chart.
institutionalized power

82
3.7.5. Line and Staff authority

In line authority, a superior exercises direct command over a subordinate. It is represented by the
standard chain of command that starts with the board of directors and extends down through the various
levels in the hierarchy to the point where the basic activities of the organization are carried out.

The nature of staff authority is merely advisory. A staff officer has the authority of ideas only.
The information, which a staff officer furnishes, or the plans he recommends flow upward to his line
superior who decides whether they are to be transformed into action. For example, a market researcher
who gathers and analyses data on marketing problems and advises the marketing manager on demand
for new products; an industrial engineer who prepares layout plans of plant equipment, production
methods and operating standards based on time studies and forwards them for the acceptance of the
production manager; an internal auditor who checks the accuracy of accounting records and suggests to
the head of the accounting department; a personnel officer who advises the personnel manager on all
dealings with unions and so on.

Levels of authority of a staff man

At the lowest level, consultation of a staff man for his ideas by the line head is purely voluntary.
The line head may or may not consult him. In fact, at this level his persuasive ability, status, backing or
technical expertise determines the extent of his influence over others. At the next higher level,
consultation is made compulsory for each department. Under this arrangement, the staff man must be
consulted before action is taken. Line people cannot ignore him. The next higher level of staff man’s
authority is one where he is granted concurring authority, so that the line people can take no action until
he agrees to it. Thus, no finished parts may move to the next stage of production until okayed by the
quality control inspector, no new employee may be hired by a department head until approved by the
personnel manager and so on are an examples of level of authority of a staff man. Under this
arrangement, if the staff and the line people do not agree, an appeal is made to the next senior man in the
hierarchy. The high-level authority people can give direct orders to people in other department outside
his formal chain of command instead of making recommendations to them.

83
3.7.6. Delegation of authority

3.7.6.1. Meaning

Delegation means assigning work to others and giving them authority to do it. It involves
granting the right to decision making in certain defined areas and charging the subordinates with
responsibility for carrying out the assigned job.

3.7.6.2. Definition

“Delegation of authority is the process of manager follows in dividing the work

assigned to him so that he performs that part which only he, because of his unique
organizational placement, can perform effectively and so that he can get others to help
with what remains”
-Louis A. Allen
3.7.6.3. Process of delegation
The process of delegation consists of the following aspects
 Assignment of duties
 Granting of authority
 Creation of accountability
1) Assignment of duties
The process of delegation starts with dividing the work into suitable parts. The manager has to
decide what part of the work he will be transferred to his subordinates. Then he assigns the duties to
subordinates indicating what he wants the subordinates to do.
2) Granting authority
Duties cannot be performed without granting of the necessary authority. So the subordinates are
given the requisite authority such as the use of resources, take necessary actions etc… to perform the
given job.
3) Creation of accountability
Accountability is the obligation to carry out the responsibility with the help of authority in
relation to the job entrusted. The subordinate to whom authority is delegated is also made accountable
for the proper performance of the job entrusted to him.
3.7.6.4. Guidelines for effective delegation
1) Before delegating authority, make the nature and scope of the task clear
2) Assign authority proportionate to the task.
3) Make the subordinate clearly understand the limits of his authority.
4) Give the subordinate some positive incentives who are accepting responsibility.
5) Train the subordinate properly. First be in front of him for checkup and guidance and the
be at his back to follow his performance
6) Create climate of mutual trust and good will. The subordinate will work much better if he
has the freedom to commit honest mistakes.
7) Do not make the subordinate accountable to more than one superior.
8) Let there be more overlaps or splits in delegation

3.7.6.5. Advantages of delegation

84
1) It enables the mangers to distribute their workload to others. By reducing the workload for routine
matters, they can concentrate one or more important policy matters

2) Delegation facilitates quick decisions because the authority to make decisions lies near the point of
action. Subordinate need not approach the boss every time for a decision arises.

3) Delegation helps to improve the job satisfaction, motivation and morale of subordinates. It helps to
satisfy their needs for recognition, responsibility and freedom.

4) By clearly defining the authority and responsibility of subordinates manger can maintain healthy
relationship with them. Delegation increases interaction and understanding among managers and
subordinates.

5) Delegation binds the formal organization together. It establishes superior–subordinate relationship

and provides a basis for efficient functioning of the organization.

6) Delegation enables a manger to obtain the specialized knowledge and expertise of subordinates.

7) It helps to ensure continuity in business because managers of lower levels are enabled to acquire to
valuable experienced in decision-making. They get an opportunity to develop their abilities and can
fill higher positions in case of need.

3.7.6.6. Barriers to effective delegation

Many managers are found unwilling to delegate authority and many subordinates are found
unwilling to accept it. The reasons for this unwillingness on both sides are as under:
A) Manager’s side:
 Fear of loss of power: Some managers are little Napoleans who want to keep all th4e
authority to make decisions in their own hand. They feel uncomfortable when they see
their subordinates making decisions, which they themselves once made.
 I can do it better myself fallacy: Some managers have an inflated sense of their own
worth. They, therefore, want to perform themselves all jobs, which come their way.
 Lack of confidence in subordinates: Some managers hesitate to delegate authority to
their subordinates because they doubt their ability. Such managers continue to keep
themselves involved in jobs, which they have delegated to their subordinates.

85
 Fear of being exposed: Some inefficient managers are always afraid of their subordinates
outshining them and providing more efficient. They are therefore, very cautious about
delegating, lest their inefficiency be exposed.
 Difficulty in briefing: Many times managers are reluctant to delegate because they think
that it is easier to do a task themselves than to brief the subordinates.

86
B) Subordinate’s side:
 They may refuse to accept authority because of their fear of criticism by their superior
incase of commit mistakes in decision-making.
 They avoid accepting any authority if they feel that they lack adequate information and
resources to help them discharge their duties properly.
 They may lack self – confidence and initiative and this may also be the cause for their
unwillingness to accept any authority.
 They may avoid accepting any authority because there are no positive personal gains to
them for assuming extra responsibility.

3.7.7. Decentralization of Authority

Centralization and decentralization refer to the location of decision-making authority in an
organization. Centralization means that the authority for most decisions is concentrated at the top of the
managerial hierarchy whereas decentralization requires such authority to be dispersed by extension and
delegation through all levels of management. Actually these terms denote different degree of delegation
of authority.
Louis A. Allen has defined both terms as “centralization is the systematic and consistent
reservation of authority at central points within an organization. Decentralization applies to the
systematic delegation of authority in an organization – wide context.”
Centralization and decentralization are opposite but relative terms because every organization
contains both the features. There cannot be absolute centralization and absolute decentralization in
practice. In case of having absolute centralization, each and every decision is to be taken by top-level
management. But practically it is not possible; some decentralization exists in all organizations. In case
of having absolute decentralization, there is no control over the activities of the subordinates, which is
also not practicable. Therefore, effective decentralization of authority requires a proper balance between
dispersal of authority among lower levels and adequate control over them.

87
3.7.7.1. Difference between Delegation and Decentralization
Sl.No Delegation Decentralisation
1 It is process of devolution of authority It is the end result achieved by the delegation.
2 It implies the relationship between a It implies the relationship between top
superior and a subordinate. management and various departments and
sections.
3 In delegation control rests entirely with Here the top management exercises only overall
the superior. control and delegates the authority for control to
the departmental heads.
4 It is must for management It is optional
5 It is a technique of management to get It is both technique and philosophy of
things done. management.
6 It can take place without There cannot be decentralization without
decentralization. delegation.

3.8. Departmentation

3.8.1. Meaning of Departmentation

Grouping of activities is an essential step in designing an organisation structure. Grouping of

activities into departments, division or other homogeneous units is known as departmentation.
Departmentation or departmentalisation is the process of grouping tasks into jobs, the combining of jobs
into effective work groups and the combining of groups into identifiable segments or departments. It
involves horizontal differentiation of activities in an enterprise. A department is a division, branch,
regiment or some other organisational unit over which a manager has authority for performance of task.
Thus, departmentation is the process of dividing the work of organisation into departments or other
manageable units.

88
3.8.2. Need and Importance of Departmentation

The basic purpose of departmentation is to make the size of each departmental unit manageable
and to secure advantages of specialisation. Departmentation is necessary on account of the following
reasons.

1. Specialization

Departmentation enables an organisation to avail of the benefits of specialisation. When every

department looks after one major function, expertise is developed and efficiency of operations increases.

2. Expansion

One manager can supervise and direct only a few subordinates. Grouping of activities and
personnel into departments makes it possible for the enterprise to expand and grow. If there is no
departmentation, the size of the organisation will be restricted to a manager's span of control.

3. Autonomy

Departmentation results in the division of the enterprise into semi-autonomous units. In these
units, every manager is given adequate freedom. The feeling of autonomy provides job satisfaction and
motivation, which in turn lead to higher efficiency of operations.

4. Fixation of Responsibility

Departmentation enables each person to know the specific part he is to play in the total
organisation. It provides a basis for building up loyalty and commitment. The responsibility for results
can be defined more precisely and an individual can be held accountable for performance.

5. Appraisal

Appraisal of managerial performance becomes easier when specific tasks are assigned to
departmental personnel. The sources of information, the skills and competence required for total
managerial decisions can be located.

89
6. Management Development

Departmentation facilitates communication, coordination and control. It simplifies the training

and development of executives by providing them opportunity to take independent decisions and to
exercise initiative.

7. Administrative Control

Departmentation is a means of dividing the large and complex organisation into small and
flexible administrative units. Grouping of activities and personnel into manageable units facilitates
administrative control. Standards of performance for each and every department can be precisely
determined. Excessive departmentation may result in several organisational problems such as erosion of
the line of command, multiple accountability, dysfunctional conflicts and difficulty of co-ordination and
control.

3.8.3. Bases (or) Types of Departmentation (Patterns of Grouping Activities)

The following patterns may be used for grouping activities into departments.

1. Departmentation by Functions.

2. Departmentation by Products.

3. Departmentation by Territory.

4. Departmentation by Customer.

5. Departmentation by Process of Equipment.

6. Departmentation by Time

7. Departmentation by Numbers

8. Composite departmentation

90
1.Functional Departmentation

Under functional departmentation each major or basic function is organized as a separate

department. Basic or organic functions are the functions the performance of which is vital and essential
to the survival of the organization. For example, production, marketing, financing and personnel are
basic functions in a manufacturing enterprise. On the other hand, in a retail stores buying, selling and
finance are the major functions. If necessary, a major function may be divided into minor or sub-
functions. For instance, activities in the production department may be classified into quality control,
processing of materials and repairs and maintenance. Thus, the process of functional differentiation may
take place through successive levels in the hierarchy. The process can continue as long as there exists a
sound basis for further differentiation. Functional departmentation is the most widely used basis for
grouping activities. It exists almost in every organization at some level.

Advantages

 It is the most logical, time proven and natural form of departmentation

 It provides occupational specialization, which makes optimum utilization of

manpower.

 It ensures the performance of all activities necessary for achieving organizational

objectives. It gives status to major functions.

 It facilitates delegation of authority.

 It enables top management to exercise effective control over a limited number of

functions.

 It eliminates costly duplication of effort.

 It simplifies training because managers have to be experts only in a narrow range

of skills.

91
 Board of Directors

Managing Director

Marketing Production Personnel Finance

Quality Processing Repairs and

Control Materials Maintenance

Disadvantages

 There is too much emphasis on specialization. When each employee specializes only in a small part
of the job, cannot develop a balanced attitude towards the job as whole.

 There may be conflicts between departments as the responsibilities are interdependent and cannot
always be clearly delineated.

 Functional departments may grow in size to justify their costs. Managers may try to build the
functional empires.

 It does not offer a good training ground for the overall development of a manager. The manager
gains expertise in handing problems of his particular department only.

2. Product departmentation Board of Directors

In product or service departmentation, every major product is organized as a separate

department. Each department looks afterManaging Directorsales and finance of one product. Product
the production,
departmentation is useful when product expansion and diversification, manufacturing and marketing
characteristics of the product are of primary significance. It is generally employed when the product
line is relatively complex and diverse requiring
Plastics specialized knowledge and a great
Chemicals Metalsdeal of capital is
Division Divisions Divisions
92

Finance Production Marketing Personnel

required for plant and equipment such as in automobile and electronic industries. Several companies in
India, such as Hindustan Lever Ltd manufacturing detergents, toiletries, chemicals and agro-based
products. Richardson and Hindustan manufacturing a range of vicks products, Clearasil cream and soap
and Johnson and Johnson manufacturing a range of products for children and surgical sutures have
product – based departments. Each division may be sub-divided into production, sales, finance and
personnel activities.

Board of Directors

Managing Director

Plastics Chemicals Metals

Division Divisions Divisions

Finance Production Marketing Personnel

Advantages

 Product department can reduce the problem of coordination between production and sales activities.
All activities concerning a particular product line are integrated together.

 It focuses individual attention on each product line, which facilitates product expansion and
diversification.

 It permits full use of specialized production facilities. Personal skills and specialized knowledge of
product managers can be fully utilized.

 The performance of each product division and its contribution to overall results can be easily
evaluated.

 It is more flexible and adaptable.

93
 This form enables top management to compare the performance of different products and invest
more resources in profitable products and withdraw resources from unprofitable ones.

Disadvantages

 There is a duplication of physical facilities and functions. Each product divisions maintain its own
specialized facilities and personnel due to which operating costs may be high.

 Advantages of centralization of certain activities like financing, accounting, industrial relations

etc… are not available.

 There may be underutilization of plant capacity when the demand for a particular product is not
adequate.

 It creates the problem of effective control over product divisions by the top management.

3.Territorial Departmentation

Territorial departmentation is very useful to a large-scale enterprise whose activities are

geographically spread over a wide area. Banks, insurance companies, transport companies, distribution
agencies and Indian railways are examples of such enterprise. Under territorial or geographical
departmentation, activities are divided into zones, divisions and branches. It is obviously not possible
for one functional manager to manage efficiently such widely separated activities. This makes it
necessary to appoint regional managers for different regions.

Board of Directors

Managing Director

Northern Western Central Eastern Southern

Region Region Region Region Region

94
Advantages

 It motivates each regional head to achieve high performance.

 It provides each regional head an opportunity to adapt to his local situation and customer need with
speed and accuracy.

 It affords valuable top management training and experience to middle level executives.

 It enables the organization to take advantage of locational factors, such as availability of raw
materials, labour, market, etc…

 It enables the organization to compare regional performances and invest more resources and
profitable regions and withdraw resources from unprofitable once.

Disadvantages

 It gives rise to duplication of various activities. Many routine and service functions performed by all
the regional units can be performed centrally by the head office very economically.

 Various regional units may become so engrossed in short run competition, themselves that they may
forget the overall interest of the total organization.

4.Customer Departmentation

Under this basis of departmentation, activities are grouped according to the type of customers.
For instance, a large cloth stores may be divided into wholesale, retail and export divisions. This type of
departmentation is useful for bans, departmental stores, etc., which sell a product or service to a number
of distinct and clearly defined customer groups. Each department specializes in serving a particular
class of customers. For example, an educational institution may have separate departments for day,
evening and correspondence courses to impart education to full time students, locally employed students
and outstation students respectively.

95
 Vice Chancellor

Registrar

Director - Director - Director -

Regular Part Time Correspondence
Programme Programme Programme

Advantages

 It ensures full attention to major customer groups, and

 It helps the company to earn goodwill.

Disadvantages

 It may result in under utilization of resources and facilities in some departments,

 There may be duplication of facilities.

96
5. Processes (or) Equipment Departmentation

Under this basis, activities are grouped on the basis of production process or equipments
involved. This is generally used in a manufacturing enterprise and at lower levels of organization. For
example, a textile mill may be organized into ginning, spinning, weaving and dyeing departments.
Similarly, a printing press may consist of composing, proof reading, printing and binding departments.
Such departmentation may also be used in engineering and oil industries. The main object is to achieve
efficiency and economy of operations.

Board of Directors

Managing Director

Ginning Dying & Packing &

Spinning Weaving
Printing Sales

Advantages

 There is clear- cut technical division of work.

 This ensures specialization and facilitates training of junior executives.

 It is possible to appoint persons with special education and experience for each process.

 Location of similar type of machines in one place results in economies in costs of repairs and
maintenance.

Disadvantages

 Coordination of departments is difficult.

 As the responsibility for profits is at the top, the departments do not focus their efforts on costs
and its reduction.

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  More specialists are essential to each process.

 It does not give training to staff members and there is a lack of overall development.

 Conflicts among managers of different processes may arise.

6. Time Departmentation

Under this basis activities are grouped on the basis of the time of their performance. For
example, a factory operating twenty-four hours may have three departments, one each for morning, day
and night shifts. The idea is to obtain the advantages of people specialized to work in a particular shift.

Advantages

 Service can be rendered around the clock basis

 It is possible to use processes that cannot be interrupted, those that require a continuing cycle.

 Expensive capital equipment can be used effectively. i.e. 24 hrs/day.

Disadvantages

 Supervising may be lacking during the night shift.

 Some people may feel difficult to switch from a day shift to a night shift and vice-versa.

 As it has several shifts, it may create problems in coordination and communication.

 Payment of overtime rates can increase the cost of the product.

7. Departmentation by Numbers

In case of departmentation by simple numbers, activities are grouped on the basis of their
performance by a certain number of persons. For example, in the army soldiers are grouped into squads,
battalions, companies, brigades and regiments on the basis of the number prescribed for each unit. This
basis of departmentation is used at the lower levels of hierarchy. Departmentation by numbers is useful
when the work is repetitive and unskilled, where manpower is the most important, where group efforts

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are more important than individual efforts and where the group performance can be measured. It is
useful only at the lowest level.

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Disadvantages

 In advanced technology world, it requires more specialized and different skills.

 Groups composed of specialized persons are frequently more efficient than those based merely
on numbers.

 It is useful only at the lower level of the organization.

8. Composite (Or) Combine Departmentation

Departmentation is not an end in itself but a means for achieving organizational objectives. Each
basis of departmentation has its own merits and demerits. Therefore, the relative advantages and
limitations of various types of departmentation should be analyzed in the light of the needs and
circumstances of the particular enterprise. That basis of departmentation is the best, which facilitates the
achievement of organizational objectives most economically and efficiently.

In practice, no single pattern is ideal to suit all situations. Therefore, no single basis is followed
for grouping activities. Rather, most of the big enterprises follow a composite or combination of several
bases. For example, an organization manufacturing agricultural machinery may follow product as the
base (tractor department, appliance department, generator department) at the primary level (i.e., the level
immediately below the chief executive), territory as the base at the intermediate level and function as the
base at the ultimate level. This is shown as follows.

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 President

Tractor Appliance Generator Product

Department Department Department Departmentation

Eastern Southern Western Territory

plant plant plant Departmentation

Functional
Production Marketing Finance
Departmentation
Matrix organization
Matrix organization is another form of combined base organization, which is becoming very
popular nowadays. Matrix organization is otherwise called Lattice pattern or Grid organization. In this
form of organization, two types of departmentalization such as functional and product
departmentalization exists simultaneously. Functional departments are a permanent fixture of the matrix
organization; they retain authority for the overall operations of their respective units. Product
departments or project teams, on the other hand, are created as the need for them arises that is, when a
specific programme requires a high degree of technical skill in a concentrated period of time. Members
of a project team are assembled from the functional departments and are placed under the direction of a
project manager. The manager for each project is responsible and accountable for its success; thus he
has authority over the other team members for the duration of the project. On the completion of the
project, the team members of the team, including the project manager revert back to their respective
departments until the next assignment to a project.
This form is now used in a variety of organizations, such as engineering companies executing
turn - key projects, hospitals, universities, etc. hospitals now have both functionally organized
departments (such as X – Ray, medicine, orthopedics, etc…) and latterly organized patient care teams.

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Universities have both functionally organized academic departments and specialized inter disciplinary
programmes (such as MBA).

General Manager
Product Departmentation

Functional Departmentation

Contract
R&D Administration Engineering Manufacturing

Contract
Project Administration Engineering Manufacturing
Manager A R & D Group Group Group
Group

Contract
Project Administration Engineering Manufacturing
Manager B R & D Group Group Group
Group

Contract
Project Administration Engineering Manufacturing
Manager C R & D Group Group Group
Group

Functional Authority

Product Authority

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Merits
 The problem of coordination, which plagues most functional designs, is minimized here because
the project manager acts as an integrator to relate personnel from diverse discipline.
 There is a reservoir of specialists, which ensures availability of expertise to all projects on the
basis of their needs.
 There is economy in cost – each project is assigned only the number of people it needs, thus
avoiding unnecessary surplus.
 There is an effective information decision system, which enables members to respond quickly to
the change in project needs.

Demerits
 It violates the traditional principle of unity of command
 It fosters conflict because of the heterogeneity of team members.
 Matrix structure may be expensive. The dual chain command may cause management costs to
double.

3.9. DECISION - MAKING

3.9.1. Meaning of Decision

A decision is a choice between two or more alternatives. This implies three things:

 When managers make decisions they are choosing right one from alternatives,

 They are deciding what to do on the basis of some conscious, and

 Deliberate logic or judgment.

A decision may be defined, in terms of commitment of resources – raw materials, machines,

finance, time, efforts etc… in a particular channel of thinking and action.

For example, a decision to advertise the product, involves the time, effort, finance of the
marketing department in preparation of advertisement programme, its implementation and reviewing its
progress.

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 Whenever a manager takes a decision, his thinking and actions are involved in a particular
direction. Whenever the decision is implemented, it implies commitment of precious organizational
resources in that particular direction.

3.9.2. Types of Decisions

Decisions can be classified in a number of ways as shown below.

 Programmed and Non – Programmed Decisions

 Major and Minor Decisions

 Routine and Strategic Decisions

 Individual and Group Decisions

 Simple and Complex Decisions

 Organizational and Personal Decisions

1). Programmed and Non-Programmed Decisions

According to Herbert Simon, Programmed decisions are concerned with relatively routine and
repetitive problems. Information on these problems is already available and can be processed in a
preplanned manner. Such decision have short – term impact and are relatively simple. These types of
decisions are made at lower level executives of management. These decisions require little thought and
judgement. The decision-maker identifies the problem and applies the predetermined solution. For
examples, granting leave to employees, purchase of raw materials, disciplinary action against late
comers, determining salary payments to employees who have been ill, and so on.

Non-programmed decisions are novel and non-repetitive. Such decisions deal with unusual
problems. It cannot be tackled in a predetermined manner. A high degree of executive judgement and
deliberation is required to solve the problem. These types of decisions are made at higher-level
management. For example, to locate a new branch office, development of a new product, and so on.

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2). Major and Minor Decisions

Some decisions are considerably more important than others. For example, decision relating to
the purchase of a new plant worth of Rs.2 crores is a major decision. Top management may decide these
decisions. On the other hand, purchase of spare parts for the machineries is a minor decision. The lower
level management people may decide matter.

3) Routine & Strategic Decisions

Routine or operating decisions are of repetitive nature. They involve short – term commitment
and have minor impact on the future of the organization. It relate to day – to –day operating of business.
Usually standard procedures are established to make such decisions quickly. Routine decisions required
little deliberation and money and are taken by managers as lower levels. For example, a supervisor can
decide whether an employee is entitled to overtime pay or not, Provision for air conditioning, better
lighting, parking facilities, cafeteria service, deputing employees to attend conferences, etc. are all
routine decisions

Strategic or policy decisions involve long – term commitments and large investments. These
exercise a permanent influence on the future of the organization as a whole. Strategic decisions need
much deliberation and judgement, because such basic decision deal with unique problems and policy
issues. These types of decisions are made at top-level management. Launching a new product, location
of a new plant, installations of computer system are examples of strategic decisions. Policy decisions are
sometimes published as policy manual to guide operating managers.

4). Individual and Group Decisions

Individual decisions are taken by a single person at his capacity without consultation with any
other persons what so ever. Individual decisions are taken where the problem is of a routine nature
where the analysis of variables is simple and where definite procedures to deal with the problem already
exist.

Group decisions taken by a group of persons constituted for particular purpose. These decisions
are generally important for the organization. Group decision making generally results in more realistic
and well balanced decisions and encourages participative decision making. But it involves delay and
makes it difficult to fix responsibility for such decisions. Decisions taken by Board of Directors or
Committee are some examples of group decision. Advantages of group decisions

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  Increased acceptance by those affected

The group’s members mostly accept decisions made by a group and they
help implement those decisions more readily.

 Easier coordination

Decisions made by groups reduce the amount of coordination necessary to

bring the decision into play.

 Easier communication

Decisions made by groups reduce the amount of communication necessary

to implement the decision.

 More information processed

Because many individuals are involved, more data and information can be
brought to bear on the decision.

Disadvantages of group decisions

 Group decisions take longer

Groups take longer than individuals to make decisions.

 Groups can be indecisive

Groups can drag on and never take decision because they can always blame other
members of the group for lack of progress.

 Groups can compromise

This can lead to decisions that satisfy the lowest common denominator. It can lead
to groupthink or conformity to peer pressure.

 Groups can be dominated

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 The highest status individual, if he chooses, can influence the group so that it
notices his or her choices. This negates the advantages of group decision-making.

If the advantages are utilized and the disadvantages avoided, groups are better decision, making
units than individuals.

Two approaches to group decision-making have recently been proposed as alternatives to the
conventional interacting or discussion group. These two approaches, known as the nominal group
technique and the Delphi technique are designed to avoid the disadvantages of groups and to utilize the
advantages of groups for effective problem-solving.

Nominal Group Technique

This technique proceeds as under:

1. Members first silently and independently generate their ideas on a problem in writing.

2. They then present their ideas (one by one) to the group without discussion. The ideas are
summarized and written on a black board.

3. The recorded ideas are then discussed for the purposes of clarification and evaluation.

4. Finally, each member silently gives his independent rating about various ideas through a
system of voting. The group decision is the pooled outcome of individual votes.

Delphi Technique

In this technique, the group consists of persons who are physically dispersed and are anonymous
to one another. They are asked to send their opinion on a topic through mail. For this purpose, they are
first sent a carefully designed questionnaire. Their responses to the questionnaire are then summarized
into a feedback report and sent back to them along with a second questionnaire which is designed to
probe more deeply into the ideas generated in response to the first questionnaire. Generally, a final
summary is developed on the basis of replies received the second time.

5). Simple and Complex Decisions

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 When variables to be considered for solving a problem are few, the decision is simple; when they
are many, the decision is complex. When we combine these two types of decisions with the low or high
certainty of their outcomes, we get four types of decisions.

 A decision in which the problem is simple and the outcome has a high degree of certainty. These
are called mechanistic or routine decisions.

 Decisions in which the problem is simple but the outcome has a low degree of certainty. These
are called judgemental decisions. Many decisions in the area of marketing, investment and
personnel are of this type.

 Decisions in which the problem is complex but the outcome has a high degree of certainty.
These are called analytical decision. Many decisions in the area of production are of this type.

 A decision in which the problem is complex and the outcome has a low degree of certainty.
These are called adaptive decision. Changes in corporate plans and policies to meet the changes
in environment and technology are decisions of this type.

6) Organizational and Personal Decisions

Organizational decisions are made to further development of organization. Managers make them
in their official capacity as allocator of resources. These decisions are based on rationality, judgement
and experience. Such decisions can be delegated to lower levels. These decisions affect the functioning
of the organization. For example, decision relating to payment of dividend, alteration of authorized
capital, adoption of new product technology etc…

Personal decisions are made by a single individual. Such decision can not be delegated. For example,
decision to retire early, decision to resign the post, decision to marry and so on. Such decisions affect the
personal life of a manager but may affect the organization indirectly or directly. For example, the
decision of a manager to proceed on a long leave is a personal decision of the manager. But then, in
interest of the organization he must depute some person for act on his behalf, till he returns.

3.9.3. Meaning of Decision-making

Decision-making is the process of choosing a course of action from among alternatives to

achieve desired results.

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3.9.4. Definition of Decision-making

Decision-making is a course of action chosen by a manager as the most

effective means at his disposal for achieving goals and solving problems.

- Theo Haimann

3.9.4.1. Relationship between decision and decision - making

Decision-making is a process; a decision is the outcome of this

process.
Process of decision-making
Decisio
n

3.9.5. Steps in Decision-making process

Following six steps involved in the process of decision-making:

Identify the problem.

Diagnosing the problem.

Discover alternative course of action.

Evaluate alternatives

Select the best alternatives

Implementing and follow-up of action.

1) Identification of the problem

The decision making process begins with the recognition of a problem that requires a decision.
The problem may arise due to gap between present and desired state of affairs. The threats and
opportunities created by environmental changes may also create decision problems. At this stage, a
manager should identify and define the real problem. A problem well defined is half solved. In order to
recognize the problem quickly, a manager must continuously monitor the decision-making

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environment,. Imagination, experience and judgement are required for detection of problems that require
managerial decisions.

2) Diagnose the Problem

Diagnosing the real problem implies analyzing it in terms of its elements, its magnitude, its
urgency, its courses, and its relation with other problems. In order to diagnose the problem correctly, a
manager must obtain all pertinent facts and analyse them carefully. The most important part of
diagnosing the problem of manufacturing costs and may start a cost reduction drive when the real
problem is poor engineering design.
The problem may be analyzed in terms of the following
 Nature of the decision-routine or strategic
 Impact of the decision,
 Futurity of the decision
 Periodicity of the decision, and
 Limiting or strategic factor relevant to the decision

Discuss
Identify the Diagnose the Alternative courses Evaluate the
Feed Back

Problem of Action Alternatives

Problem

Implement and Choose the Best

Follow up Alternative

Decision - Making Process

3) Discover Alternatives
The next step is to search for the various possible alternatives. An executive should not jump on
the first feasible alternative to solve the problem quickly. A wide range of alternatives increases the
manager’s freedom of choice. But it is advisible for the manager to limit himself to discover of those
alternatives, which are strategic or critical to the problem. The Principle of the limiting factor should be
followed for this purpose. According to Barnard, “Strategic factors refer to those that are most important

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in determining the action to be taken in solving a given problem.” For example, in a decision to expand
operations, capital or government control or size may be the limiting factors. “In choosing from among
alternatives, the more an individual can recognize and solve those factors which are limiting or critical
to the attainment of the desired goal, the more clearly and accurately he or she can select the most
favourable alternative”. The idea is to keep the range of alternatives within a manageable limit. Time
and cost constraints should be kept in mind. Development of alternatives is a creative process requiring
research and imagination. Management must ensure that the best alternatives are considered before a
course of action is selected. Relevant information must be collected and analyzed for this purpose.
4) Evaluate Alternatives
Once the alternatives are discovered, the next stage is to evaluate or screen each feasible
alternative. Evaluation is the process of measuring the positive and negative consequences of each
alternative. Management must balance the costs against possible benefits. Considerable knowledge and
judgement are required to measure the plus and minus points and to find out the net benefit of each
alternative. Both quantitative and qualitative evaluation is needed to ensure that all tangible and
intangible factors are taken into account. The element of risk involved in each alternative and the
resources available for its implementation should also be considered. Management must set some
criteria against which the alternatives can be evaluated.
Peter Drucker has suggested the following criteria to weigh the alternative courses of action:
a) Risk: Degree of risk involved in each alternative.
b) Economy of effort: Cost, time and effort involved in each alternative.
c) Timing: Whether the problem is urgent.
d) Limitation of resources: Physical, financial and human resources.
5) Select the Best Alternative
After evaluation, the optimum alternative is selected. Optimum alternative is the alternative that
will maximize the results under given conditions. Choice of the best alternative is the most critical point
in decision-making. The ability to select the best course of action from several possible alternatives
separates the successful managers from the unsuccessful ones. Past experience, experimentation,
research and analysis are useful in selecting the best alternative.
6) Implementation and Follow up
Once a decision is made it needs to be implemented. Implementation involves several steps.
First, the decision should be communicated to those responsible for its implementation. Secondly,
acceptance of the decision should be obtained. Thirdly, procedures and time sequence should be

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established for implementation. Necessary resources should be allocated and responsibility for specific
tasks should be assigned to individuals.
The implementation of the decision should be constantly monitored. The effects of the decision
should be judged through periodic progress reports. In case the feedback indicates that the decision is
not yielding the desired results, necessary changes should be made in the decision or in its
implementation.
Herbert Simon has identified three phases in the decision-making process.
i) Intelligence activity involves a search for the conditions underlying the decision. It includes
identification and diagnosis of the problem, definition of objectives and collection of
information.
ii) Decision activity is concerned with the generation and evaluation of alternative courses of
action.
iii) Choice activity implies selection of the best course of action. Post choice activity involves
implementation of the decision.

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 UNIT-IV
STAFFING & DIRECTING
4.1. Staffing
4.1.1. Meaning of Staffing
Staffing is an important function involved in building the human organization. In staffing, the
manager attempts to find the right person for each job. Staffing fixes a manager’s responsibility to
recruit and to make certain that there is enough manpower available to fill the various positions
needed in the organization. Staffing involves the selection and training of future managers and a
suitable system of compensation. Staffing obviously cannot be done once and for all, since people are
continually leaving, getting fired, retiring and dying. Often too, the changes in the organization create
new positions, and these must be filled.
In other words, Staffing is concerned with obtaining, utilizing and maintaining a satisfactory and
satisfied work force. Its purpose is to establish and maintain sound personnel relations at all levels in the
organization so as to make effective use of personnel to attain the objectives of the organization and to
provide personal and social satisfaction, which personnel want. Staffing consists of wide range of
interrelated activities.
Staffing is a very important function of management. No organization can be successful unless it
can fill and keep filled the various positions with the right type of employees. Managers would be more
competent and effective if they are carefully selected and trained. Staffing provides manpower, which is
the key input of an organization.
Staffing function has the following sub functions. They are manpower planning, recruitment,
selection, training & development, placement, compensation, promotion, appraisal etc…
4.1.2. Definition
“The managerial function of staffing involves manning the organizational
structure through proper and effective selection, appraisal and development of
personnel to fill the roles designed into the structure.”
- Koontz and O’Donnell

“The process involved in identifying, assessing, placing, evaluating and

directing individuals at work”.
- S.Benjamin

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4.1.3. Advantages of Staffing
1. It helps in discovering and obtaining competent personnel for various jobs.
2. It makes for higher performance by placing right persons on the right jobs.
3. It improves job satisfaction and morale of employees through objective assessment and fair
compensation of their contributions.
4. It facilitates optimum utilization of human resources and in minimizing costs of manpower.
5. It ensures the continuity and growth of the organization through the development of managers.
6. It enables an organization to cope with the shortage of executive talent.

4.1.4. Need for staffing

1. Increasing size of organization
In a large organization, there are several positions. Systematic programmes for the selection,
training and appraisal of employees are required for efficient functioning of the enterprise. This has
increased the significance of staffing.
2. Advancement of technology
Significant improvements have taken place in technology. In order to make use of the latest
technology, the appointment of right type of persons is necessary. Right personnel can be procured,
developed and maintained for new jobs only if the management performs its staffing function
effectively.
3. Long-range needs for manpower
In order to execute the long-term plans, management must determine the manpower
requirements well in advance. It is also necessary to develop managers for succession in future. The
need for staffing has increased due to shortage of good managerial talent and high rate of labour
turnover.
4. High wage bill
Personnel cost accounts for a major portions of operating costs today. Efficient performance of
the staffing function is essential to make the best use of personnel. For example, if right type of people
are selected and trained, management can obtain optimum results form the expenses incurred on
recruitment, selection and training.
5. Trade unionism
Efficient system for staffing has become necessary to negotiate effectively with organizations of
executives. With the spread of education, executives have become increasingly aware of their

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prerogatives. Collective bargaining has brought about change in their attitudes. Separation of ownership
from management requires a more professional approach towards the staffing function.
6. Human relations movement
Enlightened employers have come to recognize the dignity of labour – increasing awareness of
the role of human factor in industry. Now managers can use the knowledge of behavioural sciences in
molding the behaviour of employees in the right direction. At the executive level, there is greater need
for non-financial motivation. By performing the staffing function well, management can show the
significance it attaches to the human resources in the organization.
4.1.5. Factors affecting staffing
Staffing is basically a dynamic process and is affected by a variety of factors both internal and
external factors.
A) External Factors
i) Political factors
Political stability, political parties and their political gimmicks, formation of new political
parties, splits in trade unions etc. these changes in trade unions complicate the task of staffing.
ii) Economic factors
Number of economic factors affects staffing of an organization by influencing system, national
income, per capita income, distribution of income and wealth etc…
iii) Social factors
Social environment consists of social roles, social values, caste structure, occupational structure,
social forward and backward sections, religions, culture etc. these factors are also affect the staffing.
iv) Legal factors
There are various provisions, which affect the staffing policy of an organization. The act 1986,
provide the restrictions of free recruitment of child labour. These factors also affect the staffing process
of the organization.
v) Customers
Any organization depends upon customers for their survival and growth. Organization’s services are less
qualitative in which customers may develop negative attitude towards the organization.
B) Internal Factors
i) Size of the organization
Staffing practices depends upon the size of the organization. A small organization cannot have
the same staffing practices, which a large organization may have.
ii) Organizational image
The image of an organization in human resource market depends on its staffing practices like
facilities for training and development, compensation and incentives, and work culture. If all these
factors are positive, an organization may be in a better position to attract the candidates and customers.
iii) Technological factors
In technological changes technical personnel, skilled workers and machine operators are
increasingly required while the demand for other employees has reduced. The procurement of skilled
employees and their increase in numbers to match the changing job requirements has become a
complicated task.
iv) Changes in employee roles
Now a days the relationship in which employees and management are partners in the
organization the management improves the staffing process by
 To provide various benefits to improve morale

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  To introduce negotiating machinery to reduce grievances
 To encourage employee participation in decision-making.
v) Education
in recent years increased formal education led to the changes in attitude of employees. The well-
educated employees always challenge and question the management’s decision and want a voice in the
company’s affairs affecting their interest. Thus management of well-educated employees is a problem to
the organization though they make valuable contributions.

4.1.6. Recruitment
4.1.6.1. Meaning
Recruitment is the process of identifying the sources of potential employees and encouraging
them to apply for jobs in the organization. According to Dalton E. McFarland, “The term recruitment
applies to the process of attracting potential employees to the company.” The main purpose of
recruitment is to create a pool of candidates from which personnel with required skills can be selected.
Every organization has to recruit personnel through the amount of recruitment may differ from
organization to organization depending upon the size of the organization, nature of job and the
recruitment policy, etc.

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4.1.6.2. Sources of Recruitment
The sources of recruitment can be broadly classified into two categories: internal and external. Internal
sources refer to the present working force of a company. Selecting individuals from amongst the existing
employees of the company may fill vacancies other than at the lowest level. Recruitment sources are two
types. They are internal and external sources.
Internal sources
 Present permanent employees
 Present temporary/casual employees
 Retired employees
 Dependents of deceased, disabled, retired and present employees.
Merits of internal sources
 Internal recruitment can be used as a technique of motivation.
 Morale of the employees can be improved
 Employees economic needs for promotion, higher income can be satisfied.
 Trade unions can be satisfied.
 Employees become loyal to the enterprise
 Industrial peace is ensured.
 People recruited from within the organization do not need induction training.
 A better employee – employer relationship is established.
Demerits of Internal Sources
 It may encourage favouritism and nepotism.
 This method limits the choice of selection to the few candidates available within the
enterprise.
 It may lead to inbreeding, resulting in promotion of people who have developed a
respect for the tradition and who have no new ideas of their own. It is generally the new
blood which brings in new ideas.
External sources
 Re employing former employees
 Friends and relatives of present employees
 Applicants at the gate
 College and technical institutions
 Employment exchanges
 Advertising agency

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  Labour union

1. Re-employing former employees

Former employees who have been laid-off or have left for personal reasons may be re-employed.
These people may require less initial training than that needed by total strangers to the enterprise.
2. Friends and relatives of present employees
Some industries with a record of good personnel relations encourage their employees to
recommend their friends and relatives for appointment in the concern where they are employed.
3. Applicants at the gate
The factory representative interviews unemployed persons who call at the gates of the factories
and those who are found suitable for the existing vacancies are selected. This is an important source in
countries where there is a lot of unemployment.
4. College and technical institutions
Many big companies remain in touch with the colleges and technical institutions from where
young and talented persons may be recruited. This type of source is more popular in advanced countries
where there is a shortage of highly qualified technical people.

5. Employment exchanges
Employment exchanges also serve as an important source of recruitment for a number of
business concerns. They are considered a useful source for the recruitment of clerks, accountants,
typists, etc.
6. Advertising the vacancy
One more source that is tapped by the companies is advertising the vacancy in leading papers.
This source may be used in case the company requires the services of persons possessing certain special
skills or if there is an acute shortage of labour force.
7. Labour unions
In companies with strong labour unions, persons are sometimes recommended for appointment
by their labour unions. This may also be done in pursuance to an agreement between the union and the
management.

4.1.7. Selection
4.1.7.1. Meaning

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 Selection is the process of carefully screening the candidates who offer themselves for
appointment so as to choose the most suitable persons for the jobs that are to be filled. It is the process
of matching the qualifications of candidates with the requirements of jobs to be filled.
4.1.7.2. Selection Procedure
There can be no standard procedure to select different types of employees or to be adopted by all
concerns. In practice, selection procedure differs from job to job and from organization to organization.
In some cases, selection is a very simple and one-step process. But in many cases, it is quite complex
and time-consuming.
The main steps in selection procedure may be as follows
 Preliminary Interview
 Application blank
 Selection tests
 Employment interview
 Group discussion
 Checking of references
 Physical examination, and
 Final approval.

Preliminary interview
The purpose of preliminary interview is to eliminate the totally unsuitable candidates. It is
generally brief and may take place across the counter in the employment office of the company. It
consists of a short exchange of information regarding the candidate’s age, qualifications, experience and
interests. It helps to determine whether it is worthwhile for the candidate to fill in an application form. It
saves the expense of processing unsuitable candidates and saves the candidate from the trouble of
passing through the long procedure. Preliminary interview provides basic information about candidates.
Application blank
Candidates who get through the preliminary interview are asked to fill up a blank application
form specially designed to obtain the required information about the candidate. Different types of
application forms are used by different organizations and for different jobs. As far as possible, the
application blank should be brief and simple. It should elicit only such information, which is relevant for
the job concerned. Generally, an application form contains information regarding (a) personal history –
name, date of birth, sex, marital status, nationality, etc. of the candidate, (b) educational qualifications,
(c) job experience, and (d) references, etc.
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Selection tests
Tests have become an important device in the process of selection. These are used to measure
such skills and abilities, which are needed for efficient performance of the job. Several types of tests are
used in practice for screening applicants. Written test may be descriptive or objective in nature.

Employment interview
Personal interview is perhaps the most widely used method for selecting employees. It is a face-
to-face talk between the employer and the candidate. It is more thorough and comprehensive than the
preliminary interview. The main purpose of employment interview are: (a) to check the information
obtained in earlier steps, (b) to seek more information about the candidate, (c) to test the qualities of the
candidate, and (d) to inform the candidate about the job and the organization. Personal and social traits
like aptitude, interest, motivation, communicating skill, etc. can better be judged in an interview.

Checking reference
Candidates are usually required to provide some reference, i.e., names of persons to whom
inquiries as to his educational background, experience, ability, character, etc., could be addressed. A
reference can be a useful source of information in case lie is sufficiently knowledgeable and truthful. He
may be the previous employer or teacher of the candidate. Before making final selection, the enterprise
may contact the references to seek information on the candidate’s ability and integrity. A letter of
recommendation may also be asked form the candidate. Checking the references may help to point out
discrepancies regarding the candidate’s previous employment, past salary and reasons for leaving the
job.
Group discussion
This method is being increasingly used for the selection of executives and civil servants. Under
this method, several candidates are brought together and given a topic for discussion. Interviewers sit at
the back and observe how each candidate participates in the discussions. This method reveals
personality characteristics, communication skills, ability to argue logically, ability to get on with others,
ability to appreciate others’ ideas, etc.
Physical examination
Physical or medical examination of a candidate is carried out to ascertain his physical fitness for the job.
A proper medical examination will ensure high standards of health and physical fitness of the
employees. It will reduce the rates of absenteeism, accidents and labour turnover. A thorough medical
check of candidates fulfills three objectives:

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  First, it helps to ascertain the applicant’s physical capability to meet the job requirement.
 Secondly, it helps to prevent communicable diseases entering the organization.
 Thirdly, it protects the organization against unwarranted claims under the Workmen’s
Compensation Act.
Final approval
After screening the candidates a list of suitable candidates is prepared. The list is sent to the line
manager who requisitioned the personnel. He gives the final approval. The candidates formally
approved by the manager concerned are appointed by issuing appointment letters and concluding service
agreements.

4.1.8. Training & Development

4.1.8.1. Meaning
Training is an organized process for increasing the knowledge and skills of the people for doing
a particular job. It is a learning process involving the acquisition of skills and attitude. The purpose of
training is to improve the current performance. Training is a continuous process because a person never
stops training. Training should be differentiated from education development. Methods of Training

4.1.8.2. Training Methods

The various methods of training and developing executives may be classified as follows:
1. On-The-Job Methods
 Experience
 Coaching
 Under study
 Position Rotation
 Special Projects and Task Forces
 Committee assignments
 Multiple Managements
2. Off-The-Job Methods
 Selected readings
 Conferences and seminars
 Special Courses

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  Case Study
 Programmed Instruction
 Brain storming
 In-Basket exercise
 Role Playing
 Management games
 Sensitivity training

a) On-the-Job Training
On the job training involves by doing. It is considered to be an effective approach for making
managers more competent. The trainee is motivated to learn because the training takes place in the real
job situation. Little additional space and equipment is needed for training. But neither the trainee nor
the trainers are free from the daily pressure of job. The trainer has seldom the time and patience to
impart effective training.

i) Experience
This is one of the oldest methods of on-the-job training. It involves learning by doing. It is the
most practical and effective method. But it is wasteful and inefficient.
ii) Coaching and counseling
Under this method, the senior or superior plays the role of the guide and instructor of the
management trainee. He provides personal instruction and guidance. He demonstrates the task
operations and answers queries. The trainee observes the superior carefully to learn the necessary skills
of the functional area. He mentally visualizes and rehearses different facts of the job. Coaching is one
of the oldest and the vest methods of developing managers on the job. Training rakes place in a realistic
environment and the trainee is motivated to learn. The senior is in the best position to monitor and
develop managerial qualities in the subordinate. But the stress and strain of the daily duties do not
permit complete concentration on training. The senior seldom finds enough time and attention for
providing training. He may not be properly trained and oriented himself.
iii) Under study or Attachment method
When a person is promoted to higher level he is given training in the job to which he is to be
appointed. He is chosen as the successor to the current incumbent who is going to retire or resign. The
trainee is attached with the senior and is called an understudy assistant too apprentice. He is given

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adequate authority to take decision. He is not penalized for the mistakes committed during the course of
learning.

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iv) Position Rotation
Position rotation is the process of training executives by rotating them through a series of related
jobs or positions. The trainee learns several different jobs within a work unit or department. He
performs each job for a specified and limited period. Some companies follow the channel method under
which a particular discipline is earmarked for progression of the junior manager.
v) Special project and task forces
Under this method the trainee is assigned a project closely related to his job. For example,
management trainees in accounts may be asked to develop a cost control system. The trainee learn by
performing the special assignment not only work procedures but organizational relationships too. Some
times a task force is created consisting of executives from different functional areas. The trainee learns
how to work with others.
vi) Committee assignments
Under this methods the trainee managers are appointed as members of a committee. The
committee deliberates upon and discusses problem of enterprises. By participating in meetings and
discussions, every member learns analytical thinking and decision making skills managers keep abreast
of current devilments either respective areas of specialization. Committees provide an opportunity to
know what is happening in the rest of the organization.
vii) Junior boards or Multiple Management
This technique was developed by Carles Mc Cormick of Baltimore, USA under it a junior board
of executives is constituted. In this board executives discuss real life problems debate different
viewpoints and take decisions, the participants learn comprehension analysis and decision-making.
b) Off the Job Training
In recent years formal training and management development programmers have become very
popular due to the limitations of on the job training does not provide adequate expertise environment
and facilities. Secondly on the job training is inadequate for developing improved behavior patterns in
managers. Thirdly highly sophisticated tasks and techniques of management development are now
available. Training has become a specialized job. Fourthly effective training requires a great deal of
participation and group discussion among participants from diverse disciplines and cultures. This is not
always possible in case of on the job training. Fifthly, a behaviour modification of trainees requires a
simulated and highly maneuvered atmosphere not found in on the job training. In on the job training,
trainees are under the pressure and inhabitations of the daily work routine. Of the job training provides

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an uninhibited and relaxed environment. The main drawback in off the job training is the artificial work
environment, which requires adjustment to the actual work situations after the training.

i) Selected readings
This a self-improvement programme under which executives acquire knowledge by reading
professional journals and advanced books on management. Many organizations maintain their own
libraries of this purpose. Moreover, executives may become members of the professional associations to
keep abreast of latest developments in management.

ii) Conferences and seminars

In a conference, participants are required to pool their ideas viewpoints and suggestions. The
participants are normally drawn form different companies and sectors. Sometimes a conference is
divided into small groups. These groups discuss thoroughly the problems of common interest and report
their recommendations to the conference. Conferences provided a common platform for intensive group
discussion and allow the participants to look at the problem from different angles.
iii) Special courses and lectures
Special courses are designed by the company itself or by management schools. Companies
sponsor their executives to attend these courses. The participants are given classroom instructions
through lectures and audiovisual aids; they are imparted concepts, principles and techniques in various
areas of managements. For example, General management, finance and accounts, marketing,
production, personnel, and industrial relations.
iv) Case study method
A case is typically a record of an actual business issue, which has been faced by business
executives together with surroundings facts, opinions and prejudices upon which executive decision had
to depend. The case is presented to the trainee for discussion and analysis. The trainee are excepted to
identify and diagnose the problem involved, generate alternative courses of an action analyze the pros
and cons of each alternative and arrive at recommendation which the managements should adopt under
the given circumstances.
v) Programmed instruction
It is a technique of instruction without the intervention of a human instructor. It is a learner-
centered method wherein the subject matter is presented to the trainees in small steps and they are asked
to make frequent responses. They are given feedback on their responses the information is broken into
meaningful units and rearranged into a proper machines sequence so as to form learning package

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manuals electronic teaching machines and computer systems are useful method for building knowledge
and for retention of that knowledge.
vi) Brain storming
Under this method a problem is put before a group of trainees and they are encouraged to offer
ideas or suggestions. Criticism of any idea is not allowed so as to reduce inhibiting forces. Each trainee
is allowed maximum possible participations later on all the ideas are critically examined the purpose is
to maximize innovation and creativity on the part of executives.
vii) In Basket exercise
The in basket contains a number of correspondences, each of which poses a problem. The
problem is of different kinds and resembles real life problems. The trainees study memos letters,
reports, and other documents in the basket. They are required to solve each problem and to record their
decisions within a specified time period. The participants learn logical thinking; inter relationship
between problems and decision-making skills.

viii) Role Playing

Under this method two or more trainees spontaneously act out or play role in artificially created
situations. They act out the given roles, as they would be playing in real life situations. They are
informed of the roles, as they would be playing in real life situation. They are informed of the situation
and the roles they are expected to play.

ix) Management Games

Under this method, an actual business situation is presented as a model. The participants
compete with each other to analyze the problem and to take decisions; their decisions are processed in
stages. A performance report is prepared periodically to measures the success of the participants. This
method is useful in developing the ability of taking decisions with incomplete data and amid conditions
of uncertainty. It improves power of anticipation and prediction of the competitor’s action.
x) Sensitivity Training
Under this method, a small group meets in an unstructured situation. There is no plan or
schedule and no agenda or other inhibitions. The numbers of the groups are allowed to communicated
with each other freely so that each can gain an insight of his behavior as others see. The trainees are
encouraged to probe their feelings and abilities n building inters personal relationships.

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4.1.9. Performance Appraisal
4.1.9.1. Meaning
Performance appraisal or merit rating is one of the oldest and most universal practices of
managements. It refers to all the formal procedures used in working organizations to evaluate the
personalities and contributions and potential of group members.
4.1.9.2. Criteria for Performance Appraisal
There are a number of performance criteria, which may be used to measure the proficiency of an
employee. These criteria may be classified into two main categories: objective criteria and subjective
criteria. Amount of quality of production, work sample tests, length of service, amount of training
necessary, absenteeism, accidents etc., are all examples of objective criteria ratings of employees job
proficiency by their superiors, peers and subordinates, extent of upward communication of ideas, degree
of knowledge about corporate goals, contribution to socio cultural values etc., are examples of
subjective criteria. Since all subjective criteria depend upon human judgment and opinion, they are
subject to certain kinds of errors likely to be found in rating process.

4.1.9.3. Methods of Performance Appraisal

The various methods of performance appraisal may broadly be classified into two categories – i)
Trait –based appraisal, and ii) Appraisal by results.
i) Trait Based methods of Appraisal
Traditionally, managers have been evaluated against standards of personal traits and work
characteristics. The traits (qualities) generally considered are as follows:
a. Job knowledge,
b. Ability to get along with people
c. Analytical competence
d. Leader ship
e. Judgement, and
f. Initiative

The main methods of performance appraisal based on the traits of employees are given below.
1. Ranking method
Under this method an employee is compared with all other employees in the group and placed in
a simple rank order. In this way all individuals are rated from the best to the worst. This method is very
simple and natural. It is the oldest method. But it suffers from several limitations. First, the method is

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highly subjective. Secondly, it does not evaluate individual traits and only the personality of the whole
man is evaluated. Thirdly, degree of difference in ability between ranks is not measured. Fourthly, in a
large group the rater finds it very difficult to compare several people simultaneously. This method is
useful if the number of employee is very small.
2. Paired Comparison Method
This is a variation of the ranking method. In this method, the rater compares each individual in
the group with every other individual. The final ranking of each worker is determined by the number of
times he was judged better than the others. The number of pairs (comparisons) to be made can be
determined by the following formula:
Number of pairs = N (N-1) / 2
Where N stands for the number of person to be rated. This is an improvement over the ranking
method. One limitation of this approach is that the number of comparisons becomes very large. For
example, in a group of 50 workers, there would be 1,225 comparisons.
3. Graphic Rating Scales
A graphic scale is a chart that presents the list of qualities and the range of degree for each
quality. Numerical values are assigned to each quality on the scale. The scales used are generally of
two types viz., discrete scales and continuous scales.

a) Discrete scales: In which two or more categories representing discrete degrees of ability are given.
For example, the trait ‘job knowledge’ may be divided into five categories, as shown below

Poor Below Average Average Above average Outstanding

b) Continuous scales: Wherein an uninterrupted lines in given and the rater can tick at any point along
its length as shown below:

1,2 3 4,5 6,7 8,9,10

Poor Below Average Above Exceptionally
Average Average Good
The basic idea behind this type of scale is to provide the rater with a continuum representing
varying degrees of a particular trait.
Graphic rating scales are widely used for rating employees. These scales provide information on
the size of differences in ratings and help to overcome the problem of a larger number of ratings. It is
easy to construct and administer the scales. But there is a tendency on the part of the raters to pile up the

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ratings either at the middle or at the higher end of the scale. There may be differences in interpretation
among different raters and as a result the ratings by different raters might not be comparable.
Statements describing the actual behaviour of people e.g., ‘unfamiliar with work’, ‘fairly familiar with
work’ and ‘thoroughly familiar with work’ convey a better meaning than adjectives like ‘poor’, ‘below
average’, etc.
4. Forced Distribution method

Under this method certain categories (grades) of ability are established and certain percentage of
marks are assigned for each grade. The rater is forced to distribute the ratings fairly among different
grades. Example, poor 10% Below average 20%, Average 40% Above average 20% and Outstanding
10%. The employee is assigned the grade which best represents his caliber. This method overcomes the
limitation of piling up of rating on one side of the scale. It minimizes the bias of the rater. But
employees are rated for overall performance and not for individual traits.

5. Forced Choice Description

In this method, a number of statements describing the employees are prepared and the rater is
forced to choose among the descriptive statements. The statements may be both favourable and
unfavourable. The rater ticks two statements, one most characteristic and the other least characteristic of
the person being rated. For example, a forced choice block may be as follows:
i. He is hard working
ii. He is not dependable
iii. He gives clear instructions
iv. He shows favouritism towards some employees.
6. Checklist Method
A checklist is a list of statements that describe the worker and his behaviour. Each statement is
assigned a weight or value depending upon its importance. The rater writes ‘yes’ or ‘ on’ against each
statement depending upon whether it is applicable to the worker being rated or not. An individual’s
rating is determined by adding together the weights of statements applicable to the individual. A
specimen checklist is given below:
i. He is punctual Yes / No
ii. He has thorough knowledge of the job Yes / No
iii. He can easily locate faults Yes / No
iv. He does not discriminate among employees Yes / No

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7. Critical Incidents Method
Under this method certain key factors that make the difference between success and failure are
identified. These critical incidents are converted into scales. The superior then observes and records
instances and events of on-the –job behaviour falling under any of the identified factors. In this way a
concrete performance record based on actual happenings is obtained. For example, the critical incidents
in the career of an employee may be as follows:
i. Suggested improvement in work method,
ii. Refused to obey orders
iii. Violated the established rule, and
iv. Averted a serious accident.
ii) Appraisal by Results
Trait –based appraisal is simple and economical. But it is not very reliable because of the
subjectivity and bias on the part of raters. Executives dislike being evaluated by traits rather than on
their accomplishments. Managers feel that performance is in itself the most reliable indicator of quality
and potential. This feeling has led to the growth of appraisal by results. The method under plays traits
and other characteristics, focusing on performance results. The process of result-oriented appraisal
consists of the following steps:
1. The superior and each of his subordinates jointly establish the subordinate’s tasks and
responsibilities.
2. The subordinate prepares a plan for a specified period, e.g., six months or one year.
3. Through mutual consultation, the final target to be achieved by the subordinate and superior’s
supporting role are fixed.
4. At the end of the specified period, the superior makes an appraisal of the subordinate on the basis
of mutually agreed criteria.
5. Superior discusses the results and his evaluation with the subordinate. Corrective actions, if
necessary, are suggested and mutually agreed upon targets are fixed for future.

360o Performance Appraisal

The appraiser may be any person who has through knowledge about the job content, contents to
be appraised, standards of contents and who observes the employee while performing a job. The
appraiser should be capable of determining what is more important and what is relatively less important.
He should prepare reports and make judgments without bias.

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 Typical appraisers are:
 Supervisors
 Peers
 Subordinates
 Employees themselves
 Users of service and
 Consultants.
Performance appraisal by all these parties is called “360o Performance Appraisal.” Pond’s,
General Electric, Hindustan Lever Limited, Grasim, Colgate-Palmolive, Hewlett-Packard, companies
adopted 360o performance appraisal.
Supervisors
Supervisors include superiors of the employee, other superiors having knowledge about the work
of the employee and department head or manager. General practice is that immediate superiors appraise
the performance which in turn is reviewed by the departmental head/manager.
Peers
Peer appraisal may be reliable if the work group is stable over a reasonably long period of time
and performs tasks that require interaction. However, little research has been conducted to determine
how peers establish standards for evaluating others or the overall effect of peer appraisal on the group’s
attitude.
Subordinates
The concept of having superiors rated by subordinates is being used in most organizations today,
especially in developed countries. Such a novel method can be useful in other organizational settings too
provided the relationships between superiors and subordinates are cordial.
Self Appraisal
If individuals understand the objectives they are expected to achieve and the standards by which
they are to be evaluated, they are to a great extent in the best position to appraise their own performance.
Also, since employee development means self development, employees who appraise their own
performance may become highly motivated. Thermax, Escorts, Wipro etc. implement self appraisal.
Users of Services/Customers
Employee performance in service organizations relating to behaviours, promptness, speed in
doing the job and accuracy can be better judged by the customers or users of services.

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 For example, teacher’s performance is better judged by students and the performance of a doctor
is judged by the patients.
Consultants
Sometimes consultants may be engaged for appraisal when employees or employers do not trust
supervisor appraisal and the management does not trust self-appraisal, peer appraisal or subordinate
appraisal. In this situation, consultants are trained and they observe the employee at work for a
sufficiently long time for the purpose of appraisal.
When to Appraise
Informal appraisals are conducted whenever the supervisor or personnel managers feel it
necessary. However, systematic appraisals are conducted on a regular basis, say for example, every six
months or annually.

4.2. Directing
4.2.1. Introduction
After plans have been made and the organization has been established and staffed, the next step
is to move towards its defined objectives. This function can be called by various names: ‘Leading’,
‘Directing’, ‘Motivating’, ‘Actuating’, and so on. But whatever the name used to identify it, in carrying
out this function the manager explains to his people what they have to do and helps them do it to the
best of their ability.
Directing is a managerial function of guiding, inspiring, instructing, and harnessing people
towards the accomplishments of desired results. It is that part of the management process, which
actuates the members of an organization to work effectively and efficiently for the achievements of the
goals. The process of direction is concerned with the way an executive issues order and instructions and
otherwise indicates how the work is to be done. But directing does not simply mean issuing orders and
instructions. It also includes guiding and inspiring people. It is a comprehensive function.
Directing thus involves three sub-functions. They are as follows
 Motivation.
 Communication,
 Leadership and
4.2.2. Definition

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 “Directing concerns the total manner in which a manager influences the actions of
subordinates. It is he final action of a manger in getting others to act after all
preparations have been completed”.
- J.L. Massie
Direction is the interpersonal aspect of managing by which subordinates are led to
understand and contribute effectively to the attainment of enterprise objectives.
- Koontz & O’Donnel
4.2.3. Process of Directing
Following steps are involved in directing process
1) Issuing orders and instructions that are clear, complete and within the capabilities of
subordinates;
2) Continuing guidance and supervision to ensure that the assigned tasks are carried out effectively
and efficiently.
3) Maintaining discipline and rewarding those who perform well.
4) Inspiring the subordinates to work hard for the achievements of predetermined targets.
4.2.4. Principles of Direction
Direction is a complex function as it deals with people whose behavior is unpredictable. An
effective direction is an art, which a manger can learn and perfect through practice.
However, managers can follow the following principles while directing their subordinates
Harmony of Objective
Individuals join the organization to satisfy their physiological and psychological needs. They are
expected to work of the achievements of organizational objectives. They will perform their tasks better
if they feel that it will satisfy their personal goals. Therefore management should reconcile the personal
goals of employees with the organizational goals.
Maximum individual contribution
Organizational objectives are achieved at the optimum level when every individual in the
organization makes maximum contribution towards them. Managers should, therefore try to elicit
maximum possible contribution form each subordinate.
Unity of command
A subordinate should get orders and instructions from one superior only. If he is made
accountable to two bosses simultaneously, there will be confusion, conflict, disorder, and indiscipline in
the organization. Therefore, every subordinate should be asked to report to only one manager.
Appropriate techniques

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 The mangers should use correct directions techniques to ensure efficiency of direction. The
techniques used should be suitable to the superior, the subordinates and the situation. Only efficient
direction can lead to accomplishment of goals.
Direct supervision
Direct becomes more effective when there is a direct personal contact between a superior and his
subordinates. Such direct contact improves the more and commitment of employees. Therefore
wherever possible direct supervision should be used.
Strategic use of informal organization
Management should try to understand and make use of informal groups to strengthen formal or
official relationships. This will improve the effectiveness of directions.
Managerial communication
A good system of communication between the superior and his subordinates helps to improve
mutual understanding. Upward communication enables a manger to understand the subordinates and
gives and opportunity to the subordinates to express their feelings.
Comprehension
Communication of orders and instructions is not sufficient. Managers should ensure that
subordinates correctly understand shat they are to do and how and when they are to do. This will avoid
unnecessary queries and explanation.
Effective leadership
Managers should act as leaders so that they can influence the activities of their subordinates without
dissatisfying them. As leaders, they should guide and counsel subordinates in their personal problems
too. In this way, they can win the confidence and trust of their subordinates.
Principles of follow though
Directing is a continuous process. Therefore, after issuing orders and instructions, a manger
should find out whether the subordinates are working properly and what properly and what problems
they are facing. He should modify, if necessary, his orders in the light of these findings.
4.2.5. Span of Management
The term span of management is also known as span of control, and span of supervision. It refers
to the number of subordinates that report directly to a single manager or superior.
It is, however, difficult to decide the appropriate span of management. In actual practice spans
vary widely and there is no best or ideal number that can be applied in all situations. According to
Hamilton stated that span of control is related to the degree of responsibility exercised by the group
members. The smaller the responsibility of a subordinate, the greater could be the span of control.

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Thus, at the bottom of the organization (e.g. soldiers) six subordinates is the right number but at the top
(e.g., generals) three is the most appropriate number.

4.2.5.1. Theory of Graicunas

V.A. Graicunas was a French management consultant. He developed a mathematical formula by
analyzing superior-subordinate relationship. He suggests that as the number of subordinate’s increases
arithmetically there is an exponential increase in the number of possible relationships; Graicunas has
identified three types of superior –subordinate relationships:
 Direct single relationship: The direct single relationship arises from the direct and individual
contacts of the superior with his subordinates. For example, if a manager A has two subordinates
X and Y there would be two direct single relationships: a) A with X, and b) A with Y.
 Direct group relationships: These relationships arise between the manager and groups of his
subordinates in all possible combinations. Thus, for example, if a manager A has two
subordinates X and Y there would be two direct group relationships: a) A with X,Y in
attendance, and b) A with Y,X in attendance.
 Cross-relationships: These relationships arise among the subordinates working under a
common superior. For example, if a manager A has two subordinates X and Y there would be
two cross-relationships; a) X with Y, and b) Y with X

Direct single relationships = n

Direct group relationships = n (2n/2 – 1)
Cross relationships = n (n-1)
Total relationships = n (2n/2 +n– 1)
Where n = number of subordinates.

4.2.5.2. Factors Determining Span of Management

In actual practice, a large number of variables determine the span of management. Some of these
factors are as follows:
1. Nature of Work
When the work performed by subordinates is simple and repetitive, they do not require frequent
guidance. As a result the manager can supervise a large number of subordinates. But if the work is
different or non-identical, span has to be narrow. Similarly, the rate of change in work also affects the

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span. When the work is stable or does not change frequently, standing guidelines can be laid down the
wider span of management is possible.

2. Type of Technology
Firms using mass production and assembly line technology can have wider span than those
employing batch or process production systems.
3. Ability of the manager
Managers possessing qualities like leadership, communication, decision-making and control can
manage more subordinates. Moreover, the attitude and personality of a manager also determine the
span. For instance, an empire builder may have a greater span than a submissive manager.
4. Capacity of subordinates
Efficient and trained subordinates may perform their jobs efficiently without much help from the
manager. They need only broad guidelines. In such a case, less time is needed in managing and the
span can be larger. New and inexperienced employees require more time of a supervisor than
experienced and dedicated employees.
5. Degree of Decentralization.
When a manager does not delegate adequate authority to subordinates, they require frequent
consultation and the manager has to take many decisions himself. As a result he can supervise few
subordinates. If, on the other hand, a manager clearly delegates authority, subordinates themselves will
take many decisions and the manager can effectively supervise a large number of people.
6. Planning
If policies, procedures and rules are clearly defined-subordinates can direct their own work on
the basis of these guidelines. Standing plans simplify repetitive decisions and relieve the manager’s
burden. In the absence of clear plans, span has to be narrow, because subordinates require much
consultation and guidance.
7. Staff Assistance
Use of staff assistants, like private secretary, can reduce the work load of the manager, thereby
permitting him to handle more subordinates.
8. Communication Techniques
Where everything is communicated by face-to-face contact, it takes much of a manager’s time
and span has to be small. Use of electronic and other devices speeds up communication thereby
increasing the span of management.

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9. Time Available for supervision
At higher levels top managers have less time for supervision. They have to devote the major
portion of their time in planning and organizing. Therefore, span has to be narrow.

10. Geographical Dispersion of Subordinates

When the employees are physically dispersed at different places, their supervision and control
from the headquarters is difficult. Therefore, span of management is relatively smaller.

4.2.5.3. Narrow and wide spans

Narrow span of management means very few subordinates report directly to a manager. On the
other hand, wide span implies a large number of subordinates reporting to a manager. Ralph C.Davis has
suggested that higher levels of management can adopt narrow span since planning and policymaking is
the major task. Here narrow span implies three to seven subordinates to a manager. At middle and
supervisory levels, work is primary of routine nature. Therefore it requires less direct contact and
interaction. As a result, span of management increase to as many as ten to thirty persons per manager.
The following factors may also make it possible to adopt wider span of management in modern day
organization.
 Trend toward decentralization
 Improved communication techniques
 Increasing size of organization, and
 New pattern of leadership with democratic style.

4.2.6. Motivation
4.2.6.1. Meaning
The term motivation has been derived from the word motive. Motive is anything that initiates or
sustains activity. It is an inner state that energizes activates or moves and that directs or channels
behavior towards goals motive is a psychological force within an individual that sets him in motion.
4.2.6.2. Definition
“Motivation is a general term applying to the entire class of drives, desires,
needs, wishes and similar forces that induce an individual or a group of people to
work”
- Koontz & O’Donnell

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 “Motivation means a process of stimulating people to action to accomplish desired
goals”
- Scott

4.2.6.3. Nature/Characteristics of Motivation

Following are the characteristics of motivations:
Motivation is a personal and internal feeling
Motivation is a psychological phenomenon, which generates within an individual. Motives are the
energetic forces within a person that drive him to action.
Motivation produces goals directed behavior
Motivation is a behavioural concept that directs human behaviour towards certain goals.
Motivation is a continuous process
Human needs are unlimited. Therefore, motivation is an ongoing process.
Motivation is complex
Individuals differ in their motivation. Different people seek different things or they work for
different reasons. Human needs and motives are varies and they change form time to time. Human
motivation is partly logical and partly emotional.
Motivation is system oriented
Motivation is the result of interplay among three groups of factors (a) influences operating with in
an individual, (for example, his goals needs and values). (b) Influences operating within the
organization, (e.g. organization structure, technology, physical facilities and nature of the job, etc., ) and
(c)forces operating in the external environment, (e.g. culture customs, norms etc., of the society).
Motivation can be either positive or negative
Positive motivations implies use of pay incentives, etc., to satisfy human needs while negative
motivation emphasizes penalties, e.g. reprimands, threats of demotion, fear or loss of job, etc.,
Motivation is different from job satisfaction
Motivation is the drive to satisfy a want and its is concerned with goal directed behaviour. Satisfaction
refers to contentment after the satisfaction of want. Motivation is the process while satisfaction is the
outcome or consequence.

4.2.6.4. Importance of Motivation

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 A lot of importance has been given to the process of motivation in the area of organizational
behaviour. The process of motivation is applicable to all cadres of employees, workers, supervisors,
managers and employees in all walks of life.
The demotivated worker, demotivate others in the society and they cause much damage at home
and in industries. Motivation is the basic factor and the cause for any behaviour. Motivation is only
overt but also covert in nature. So, the expert in organization behaviour recognizes the importance of
motivation and accords top priority to the concept.
Nowadays, managers spent more time in their attempts to motivate their subordinates than in any
other managerial function. Yet the word motivation is often misused and misunderstood by many of us.
It is the force or urge that is within the individuals that force them to act.

4.2.6.5. Motivational Techniques or Tools

Motivational tools or techniques are instruments that prompt people to action. Hence, while using
motivational tools, these should be adequate and capable enough to motivate employees to make their
maximum efforts to accomplish the set goals. Various motivational techniques are used to motivate
employees in business organization are broadly classified into monetary (financial) and non-monetary
(Non-financial) techniques of incentives.
As human needs vary between people and between different points of times in case the same
person, motivational techniques are therefore bound to vary accordingly, for example, while increase in
salary may satisfy one’s physiological needs, recognition may satisfy the esteem needs. Better the
motivational techniques, greater would be its effect on the individual behaviour. This would in turn lead
to organizational effectiveness.
I) Financial Incentives
Incentives, which are given in the form of money, are called financial incentives. This can be
classified into two points.
 Individual financial incentives
 Collective financial incentives
a) Individual financial Incentives
This type of incentives includes all such incentive plans, which induce an individual to achieve
higher output to earn higher financial reward. F.W.Taylor’s piece rate system, Habey’s efficiency plan
are examples of such incentives. The basic assumptions behind these incentives are that in individual
will be motivated for higher output to earn money, which satisfies his need.
b) Collective financial incentives

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 This type of incentives tries to motivate individuals collectively. The basic ideas of these
incentives are the same as the individual incentives. However, these incentives are collectively given to
employees for motivating them. Eg. Bonus, profit sharing, Pension plan etc.

II) Non-financial Incentives

Individuals have various needs, which want to satisfy while working in the organization. People
at comparatively higher level of managerial hierarchy attach more importance to sociophychological
needs, which can not be satisfied by money alone. Thus, management in addition to financial incentives,
provide non-financial incentives to motivate people in the organization. The importance of non-
financial incentive is to provide psychological and emotional satisfaction rather than financial
satisfaction. For example, if an individual gets promotion in the organization, it satisfies him
psychologically more i.e. he get better status, challenging job, authority etc. than financial benefits.
The non-financial incentives can be grouped as under:
 Individual non-financial incentives.
 Collective non-financial incentives.
 Institutional non-financial incentives.
a) Individual non-financial incentives.
These incentives motivate people on individual basis. The various forms of individual non-
financial incentives are as follows:
 Status: Status means the ranking of position, rights and duties in the formal organization
structure. It is an instrument of motivation because it is extremely required for most of the people.
The status system should be closely related to the abilities and aspiration of people in the
organization.
 Promotion: It is a movement to a higher position in which the responsibilities and powers
are more. Promotion satisfies the needs of human beings in organization.
 Responsibility: Most of the people prefer challenging jobs or the jobs which has got more
responsibilities rather than monotonous and routine in nature. If the job is connected with more
responsibilities, it satisfies people’s natural and inherent characters and they put more efforts in the
respective jobs.

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  Making the job pleasant and interesting: The work can be made enjoyable and pleasant
if its so designed that it allows employees to satisfy the natural instincts. This create interest in the
work and employees take it natural as play.
 Recognition of work: It means acknowledgement with a show of appreciation. When
such appreciation is given to the work performed by the employees they feel motivated to perform
work at similar (or) higher level.
b) Collective non-financial incentives
Workers may be motivated in groups also. They perform their duties in groups and the group
affects them. Some of the collective non-financial incentives are as follows:
 Social importance to work
 Team spirit
 Competition
 Social importance to work: People generally prefer a work, which is socially acceptable,
if the society gives the importance and praise the work, people like to perform.
 Team spirit: Management should encourage Team spirit i.e. work in co-operation and co-
ordination.
 Competition: Sometimes for providing incentives to employees, competitions are
organized between different individuals (or) different groups.
c) Institutional non-financial incentives
 Human Relations in industries: It is related with the policies to be adopted in the
organization to develop a sense of belongingness with employees, improve the efficiency and treat
them as human beings and not merely a factor of production.
 Participation: Participation is related to superior-subordinates, both involved in making decision
and discharge their responsibilities towards achieving organizational objectives.

4.2.6.6. Theories of Motivation

When the human organizations were established, various thinkers have tried to find out the answer to
what motivates people to work. Different approaches applied by them have resulted in a number of
theories on motivation.

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4.2.6.6.1. Maslow’s Need Hierarchy Theory
Maslow’s theory is based on the human needs. Drawing chiefly on his clinical experience, he
classified all human needs into a hierarchical manner from the lower to the higher order. In essence, he
believed that once a given level of need is satisfied, it no longer serves to motivate man.
Moslow identified five levels in his need hierarchy as shown in the above figure.
5

SELF
4
ACTUALISATION
3 ESTEEM NEEDS

1
2 SOCIAL NEEDS

1 SAFETY NEEDS

PHYSIOLOGICAL NEEDS

Maslow’s Need Hierarchy

1. Physiological Needs
These needs are basic to human life and, hence, include food, clothing, shelter, air, water and
other necessities of life. These needs are relate to the survival and maintenance of human life. They
exert tremendous influence on human behaviour. These needs are to be met first at least partly before
higher level needs emerge. Once physiological needs are satisfied, they no longer motivate the man.
2.Safety Needs
After satisfying the physiological needs, the next needs felt are called safety and security needs.
These needs find expression such desires as economic security and protection from physical dangers.
Meeting these needs requires more money and hence, the individual is prompted to work more. Like
physiological needs, these become inactive once they are satisfied.

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3.Social Needs
Man is a social being. He is therefore, interested in socal interaction, companionship, belongingness,
etc. It is this socializing and belongingness why individuals prefer to work in groups and especially older
people go to work.
4. Esteem Needs
These need refer to self-esteem and resolve respect. They include such needs, which indicate self-
confidence, achievement, competence, knowledge and independence. The fulfillment of esteem needs
leads to self-confidence, strength and capability of being useful in the organization. However, inability
to fulfil these needs results in feelings like inferiority, weakness and helplessness.
5. Self-Actualization Needs
This level represents the culmination of all the lower, intermediate and higher needs of human beings.
In other words, the final step under the need hierarchy model is the need for self-actualization. This
refers to fulfillment.
According to Maslow, the human needs follow a definite sequence of domination. The second
need does not arise until the first is reasonably satisfied, the third need does not emerge until the first
two needs have been reasonably satisfied and so on.
Criticism made against this theory is as follows:
1. The needs may or may not follow a definite hierarchical order. So to say, there may overlapping in
need hierarchy. For example, even if safety need is not satisfied, the social need may emerge.
2. The need priority model may not apply at all times in all places.
3. Researches show that man’s behaviour at any time is mostly guided by multiplicity of behaviour.
Hence, Moslow’s preposition that one need is satisfied at one time is also of doubtful validity.
4. In case of some people, the level lof motivation may be permanently lower. For example, a person
suffering from chronic unemployment may remain satisfied for the rest of his life if only he/she can get
enough food.
Notwithstanding, Maslow’s need hierarchy theory has received wide recognition, particularly among
practicing managers. This can be attributed to the theory’s intuitive logic and easy to understand. One
researcher cam to the conclusion those theories that are intuitively strong die-hard.
4.2.6.6.2. Herzberg’s Motivation Hygiene Theory
The psychologist Frederik Herzberg extended the work of Maslow and proposed a new
motivation theory popularly known as Herzberg”s Motivation Hygiene (Two-Factor) Theory. Herzberg
conducted a widely reported motivation study of 200 accountants and engineers employed by firms in an
around Western Pennsylvania. He asked these people to describe two important incidents at their jobs:

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 a. When did you feel particularly good about your job? and
b. When did you feel exceptionally bad about your job?
He asked the critical incident method of obtaining data. The responses when analyzed were
found quite interesting and fairly consistent. The replies respondents gave when they felt good about
their jobs were significantly different from the replies given when they felt bad. Reported good
feelings were generally associated with job satisfaction whereas bad feelings with job dissatisfaction.
Herzberg labeled the job satisfies motivators and he called job dissatisfies hygiene or maintenance
factors. Taken together, the motivators and hygiene factors have become known as Herzberg’s two-
factor theory of motivation.
Herzberg’s motivational and hygiene factors have shown in this table.
Hygiene: Job dissatisfaction Motivators: Job satisfaction
Achievement
Recognition
Work itself
Responsibility
Advancement
Growth

Company Policy and

Administration
Supervision
Interpersonal Relations
Working Conditions
Salary
Status
Security
According to Herzberg, the opposite of satisfaction is not dissatisfaction. The underlying reason,
he says, is that removal of dissatisfying characteristics from a job does not necessarily make the job
satisfying. He believes in the existence of a dual continuum. The opposite of ‘satisfaction’ is no
satisfaction and the opposite of ‘dissatisfaction’ is no ‘dissatisfaction’.
According to Herzberg, today’s motivators are tomorrow’s hygiene because the latter stop
influencing the behaviour of persons when they get them. Accordingly one’s hygiene may be the
motivator of another.
Criticism of Herberg’s model
1. People
generally tend to take credit themselves when things go well. They blame failure on the external
environment.
2. The theory basically explains job satisfaction not motivation.

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3. Even job satisfaction is not measured on an overall basis. It is not unlikely that a person may dislike
part of his/her job, still thinks the job acceptable.
4. This theory neglects situational variable to motivate an individual.
Regardless of criticisms, Herzberg “two factor motivation theory’ has been widely read and a
few managers seem unfamiliar with his recommendations. The main use of his recommendations lies in
planning and controlling of employee’s work.

Distinction between Maslow’s and Herzberg’s Theories

Both Maslow and Herzberg theories focus on motivational factors. However, both differ from
each other in their approaches. As discussed earlier, Maslow’s motivation theory is based on the
hierarchy of needs. According to this theory, only unsatisfied needs motivate individuals. Once a need is
satisfied, it ceases to be a motivating factor. But Herberg’s motivation theory is based on motivational
and hygiene of maintenance factors. According to Herzberg, hygiene or maintenance factors prevent job
dissatisfaction but do not provide motivation to workers. In his view, Maslow’s lower order needs like
physiological, safety and social needs act as hygiene or maintenance factors.

4.2.6.6.3. McClelland’s Need Theory

Another well-known need-based theory of motivation, as opposed to hierarchy of needs or
satisfaction-dissatisfaction, is the theory developed by McClelland and his associates. McClelland
developed his theory based on Henry Murray’s long list of motives and manifest needs used in early
studies of personality. His theory focuses on Murray’s three needs: Achievement, Power and Affiliation.
They are defined as follows:

 Need for Achievement: This is the drive to excel, to achieve in relation to a set of standard, and to
strive to succeed. In other words, need for achievement is a behaviour directed toward competition with
a standard of excellence. McClelland found that people with a high need for achievement perform better
than those with a moderate or low need for achievement and noted regional/national differences in
achievement motivation. Through his research, McClelland identified the following three characteristics
of high need achievers.
1. High need achievers have a strong desire to assume personal responsibility for performing a task
or finding a solution to a problem.
2. High need achievers tend to set moderately difficult goals and take calculated risks.
3. High need achievers have a strong desire for performance feedback.

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 Need for Power: The need for power is concerned with making an impact on others, the desire to
influence others, the urge to change people, land the desire to make a difference in life. People with high
need for power are people who like to be in control of people and events. This results in ultimate
satisfaction to man.
People who have a high need for power are characterized by:
1. A desire to influence and direct somebody else.
2. A desire to exercise control over others.
3. A concern for maintaining leader-follower relations
 Need for Affiliation: The need for affiliation is defined as a desire to establish and maintain friendly
and warm relations with other people. The need for affiliation, in many ways, is similar to Maslow’s
social needs. The people with high need for affiliation have these characteristics.
1. They have a strong desire for acceptance and approval from others.
2. They tend to conform to the wishes of those people whose friendship and companionship they
value.
3. They value feeling of others.
4.2.6.6.4. Vroom’s Expectancy Theory
Victor Vroom in his Expectancy Theory offers one of the most widely accepted explanations of
motivation. It is a cognitive process theory of motivation. The theory is founded on the basic notions
that people will be motivated to exert a high level of effort when they believe there are relationships
between the effort they put forth, the performance they achieve, and the outcomes/rewards they receive.
The relationships between notions of effort, performance, and reward are depicted in Figure.
Thus, the key constructs in the Vroom’s expectancy theory of motivation are:
1. Valence: Valance, according to Vroom, means the value or strength one places on a particular
outcome or reward.
2. Expectancy: It relates efforts to performance.
3. Instrumentality: By instrumentality, Vroom means, the belief that performance is related to rewards.

Effort Performanc Reward

e

Will my effort Will Will rewards

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improve my performance satisfy my
performance? lead to rewards? individual goals?
Thus, Vroom’s motivation can also be expressed in the form of an equation as follows.
Motivation = Valence x Expectancy X Instrumentality
Being the model multiplicative in nature, all the three variables must have high positive values to
imply motivated performance choices. If any one of the variables approaches to zero level, the
possibility of the so motivated performance also touches zero level.
However, Vroom’s expectancy theory has its critics. The important ones are:
1. Critics like Porter and Lawler lebeled it as a theory of cognitive hedonism which proposes that
individual cognitively chooses the course of action that leads to the greatest degree of pleasure or
the smallest degree of pain.
2. The assumption that people are rational and calculating makes the theory idealistic.
3. The expectancy theory does not describe individual and situational differences.
But the valence, or value people place on various rewards varies. For example, one employee prefers
salary to benefits, whereas another person prefers to just the reverse. The valence for the same reward
varies from situation to situation.
In spite of all these critics, the greatest point in the expectancy theory is that it explains why a
significant segment of workforce exerts low levels of efforts in carrying out job responsibilities.
4.2.6.6.5. Porter and Lawler’s Expectancy Theory
In fact, Porter and Lawler’s theory is an improvement over Vroom’s expectancy theory. They posit that
motivation does not equal satisfaction or performance. The model suggested by them encounters some
of the simplistic traditional assumptions made about the positive relationship between satisfaction and
performance. They proposed a multi-variety model to explain the complex relationship that exists
between satisfaction and performance. What is the main point in Porter and Lawler’s model is that effort
or motivation does not lead directly to performance.
It is, in fact, mediated by abilities and traits and by role perceptions. Ultimately, performance
leads to satisfaction. This is depicted in the following figure.Let us briefly discuss the main elements of
the model:
 Effort: Effort refers to the amount of energy an employee exerts on a given task. How much effort
an employee will put in a task is determined by two factors – (i) value of reward and (ii) perception
of effort-reward probability.

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 Performance: One’s effort leads to his/her performance. Both may be equal or may not be.
However, the amount of performance is determined by the amount of labour and the ability and role
perception of the employee. Thus, if an employee possesses less ability and/or makes wrong role
perception, his/her performance may be low in spite of his putting in great efforts.
 Satisfaction: Performance leads to satisfaction. The level of satisfaction depends upon the amount of
rewards one achieves. If the amount of actual rewards meet or exceed perceived equitable rewards,
the employee will feel satisfied. On the contrary, if actual rewards fall short of perceived ones,
he/she will be dissatisfied.

Value of Abilities Perceived

Reward and Equitable
Traits Rewards

Intrinsic
Reward
s

Perfor- Satis-
Effort -mance -faction

Extrinsi
c
Perceived Role Reward
effort- Percept- s
reward -ions
probability

Rewards may be of two kinds-intrinsic and extrinsic rewards. Examples of intrinsic rewards are
such as a sense of accomplishment and self-acualisation. As regards extrinsic rewards, these may
include working conditions and status. A fair degree of research supports that the intrinsic rewards are
much more likely to produce attitudes about satisfaction that are related to performance.

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 There is no denying of the fact that the motivation model proposed by Porter and Lawler is quite
complex than other models of motivation. In fact, motivation itself is not a simple cause effect
relationship rather it is a complex phenomenon. Porter and Lawler have attempted to measure variables
such as the values of possible rewards, the perception of effort-rewards probabilities, and role
perceptions in deriving satisfaction. They recommended that the managers should carefully reassess
their reward system and structure. The effort-performance-reward satisfaction should be made integral
to the entire system of managing men in organizations.

4.2.6.6.6. McGregor’s Theory ( X & Y Theory)

Prof. Douglas McGregor has introduced two theories in his famous book, “The Human side of
Enterprise”. They are called ‘X’ theory and ‘Y’ theory.
X – Theory

This theory is based on “papa knows best”. In other words, a manager has thorough knowledge
and excludes workers from decision – making process. A manager has authority or power to take
decisions. The workers should follow whatever decisions are taken by the managers.

Assumptions of X – Theory
 Workers have an aversion to work inherently.
 Workers may find a way to postpone the work completion in laziness.
 Workers may do the job half – heartedly.
 Fear of punishment can motivate the workers into action.
 The worker may know the hazards of non- performance of a work.
 No worker is ready to accept any responsibility.
 There is a need for explaining the consequences of being inactive.
 Workers are not interested in achievement. They prefer to maintain status quo.
 A worker prefers to be directed by others.
 Workers hate to improve their efficiency. They reason is that they fear losing their
present job.
 Workers is also one of the factors of production and does not deserve any special
treatment.
 Worker lacks integrity.
 Workers avoids taking decision whenever necessary.

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 X – Theory is regarded as the means to supervise and control the workers. Decision – making in
all the fields is entrusted with the managers. Workers are allowed to express their suggestions and
emotions. But the decisions are taken by managers and workers are forced to follow the decisions.

Y – Theory
Y – Theory is just opposite to X – Theory. So, X – theory is considered as traditional theory and
Y- theory as modern theory. Y – Theory emphasizes the importance of workers in the accomplishment
of enterprise objectives.
Assumptions of Y – Theory
 The average human being has the tendency to work. A job is as natural just like a
play.
 Once the worker understands the purpose of job, he may extend his cooperation for
job completion.
 Worker can put in his best efforts for the accomplishment of enterprise objectives
early.
 Worker has self-direction, self-motivation, self-discipline and self-control.
 If the management prepares right motivation scheme, the worker is ready to accept
extra responsibility.
 The existing worker has competence to work and can take right decisions.
 A worker expects recognition of the successful accomplishment of task.
 A worker may exhibit his efficiency even for non-monetary rewards such as
participation in decision-making, increased responsibility etc…
 The potentialities of human beings are not fully utilized by any industry.

According to Y – Theory, a worker has integrity and readiness to work hard. He is willing to
participate in the decision making process and shows a sense of creativity and imagination. So, X –
Theory may say to be a negative and pessimistic one and Y –Theory may say to be positive and
optimistic.
4.2.7. Leadership

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 Leadership is a term that conjures up different images in different people. While to some it
means charisma, to others, it means power and authority.
4.2.7.1. Definition
“Leadership is the activity of influencing people to strive willingly for group
objectives”.
- George K. Terry
“Leader as the art or process of influencing people so that they will strive
willingly and enthusiastically towards the achievement of group goals”.
“Leadership is the quality of behaviour of individuals whereby they guide
people or their activities in organizing efforts”.
- Koontz et. al.
After going through the above definitions of leadership, it can safely be defined as a process of
influencing group activities towards the achievement of certain goals.
The person who guides or influences the behaviour of others called ‘leader’ and people guided or
influenced are called the ‘followers’.
4.2.7.2. Characteristics of leadership
1. Leadership is a continuous process of influencing other’s behaviour.
2. Leadership basically a personal quality that enable leader to influence the subordinate’s
behaviour at work.
3. The success of a leader depends on the acceptance of his leadership by the followers. Of course,
the situational variables also affect the effectiveness of leadership.
4. There is a relationship between leader and followers, which arises out of functioning for a
common goal.
4.2.7.3. Ingredients of Leadership
Leaders envision the future; they inspire organization members and chart the course of the
organization. Every group of people that performs near its total capacity has some person as its head
who is skilled in the art of leadership. This skill seems to be a compound of at least four major
ingredients.
 The ability to use power effectively and in a responsible manner.
 The ability to comprehend that human beings have different motivation
forces at different times and in different situations
 The ability to inspire and

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  The ability of act in a manner that will develop a climate conducive to
responding to and arousing motivations.
4.2.7.4. Leadership Styles
There are three basis styles of leadership:
 Autocratic or Authoritative Style
 Democratic or Participative Style
 Laissez-Faire or Free-Rein Style

a) Autocratic or Authoritative style

In autocratic style, the leader centralizes power and decision-making in himself/herself.
The leader commands complete control over the subordinates who are compelled to obey the orders.
The subordinates have no opportunity to make suggestions or take part in decision-making function.
The autocratic leader has little concern for the well being of employees. In turn, employees have a
tendency to avoid responsibility and try to work as little as possible. They also suffer from frustration
and low morale.
Limitations of autocratic leadership style
 It results in low morale and job satisfaction.
 Employee’s efficiency tends to decline over period.
 Potential manager-leader employees do not get opportunity to exhibit their capabilities.
However, the autocratic style of leadership is suitable in the following situations when:
 Subordinates are incompetent and inexperienced.
 The leader wants to be active and dominant in decision making.
 The leader is highly competent for making a right decision.
b) Democratic or Participative Style.
In democratic style of leadership, the leader takes decision in consultation with the subordinates.
In other words, the subordinates participate in decision making function. Hence, the style is also known
as Participative style. Participation in decision-making enables subordinate to satisfy their social and
ego needs. It also makes them more committed to their organizations. Frequent interaction between the
manager-leader and subordinates also helps build up mutual faith and confidence.
Advantages

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1. It gives opportunity to the subordinates to develop their potential abilities and assume greater
responsibilities.
2. It provides job satisfaction, on the one hand, and improves the morale of subordinates, on the other.
3. Subordinates’ participation in decision-making helps make right decision because ‘two heads are
better than one’.
Despite the above benefits, democratic style leadership cannot be regarded as the best style under all
situations.
Limitations
 Decision-making is a time-consuming process in democratic style.
There is possibility that a few dominant subordinates may influence decision in their favour.
 The responsibility for implementing decision cannot be fixed on an individual
subordinate but on the whole group.
 Sometimes the decisions taken become the distorted one because ‘Many cooks spoil the
broth’.

However, the democratic style is found suitable in the following situations when:
1. Subordinates are competent and experienced.
2. The leader prefers participative decision-making.
3. The organization has made its objectives transparent to the employees.
4. Reward and involvement are used as the primary means of motivation and control.
c) Laissez-Faire Style (or) Free – Rein style

Laissez faire style is just the opposite of autocratic style. In Laissez-faire style, the manager-
leader leaves decision-making to the subordinates. The leader completely gives up his/her leadership
role. The subordinates enjoy full freedom to decide as and what they like. The biggest limitation of
this style is that due to full freedom to subordinates, it creates chaos and mismanagement in decision-
making.

Nonetheless, laissez faire style if found suitable in the following situations when:
 Leader is able to fully delegate the powers of decision-making to his/her subordinates.
 Subordinates are also well competent and knowledgeable.
Organizational goals and objectives

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4.2.7.5. Leadership Theories
There are a number of theories, which provide explanations regarding various aspects of
leadership phenomenon. Some of the important theories are discussed below:
4.2.7.5.1. Fiedler’s Contingency Model
According to the contingency theories of leadership, the success of leadership depends upon the
situation in which the leader operates. Fred E.fiedler developed a contingency model of leadership.
According to him, a leader’s effectiveness depends upon the following three situational factors:
 Leader-followers relations, that is the degree of follower’s trust confidence and respect
for the leader.
 Task Structure, that is the nature of task performed by the subordinates.
 The Status Power, that is the degree of power associated with the position or status held
by the leader in the organization.
The most favourable situation for leaders to influence their group is one in which they are well
liked by the members, the task performed is highly structured and the leader has enough power attached
to his/her position in the organization. On the other hand, the most unfavourable situation for leaders is
one in which they are disliked, the task is highly unstructured and little power is attached to the leader’s
position.

4.2.7.5.2. Path-goal Leadership Theory

Robert House has developed a path-goal theory of leadership initially presented by Martin
Evans. This theory is based on the expectancy theory of motivation. The theory states that leaders can
exercise four different kinds of styles. Directive leadership (giving directions to the subordinates rather
than seeking their cooperation). Supportive leadership (being friendly and approachable to
subordinates), participative leadership (asking for suggestions from subordinates before making
decisions.) and achievement-oriented leadership (setting challenging goals and assignments for
subordinates). The path-goal theory postulates that leaders become effective due to their influence on
followers’ motivation, ability to perform, and their satisfaction. Leader motivates the employees by
influencing their expectancies relating to the performance and attractiveness of goal. The subordinates
feel satisfied when they believe that their job performance will lead to desirable outcomes. They will be
able to achieve their goals with hard work.
4.2.7.5.3. Situational Leadership Theory
The situational leadership model is developed by Paul Hersey and Kenneth Blanchard, which suggests
that the leadership effectiveness depends upon the situation in which leadership is exercised. In their

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model, the authors have employed two dimensions of leader behaviour as were used in Ohio State
University studies as discussed earlier. The two dimensions were task (production-oriented) and
relationship (people-oriented). The level of followers’ development, or say, maturity is categorized into
four levels based on their ability and willingness to accept responsibility for completing their task.
Followers who are unable and unwilling are categorized as the least nature, and those who are both able
and willing are termed as the most mature. The model suggests that the two different types of styles are
used to influence the followers of four different levels of maturity as is depicted in the following Figure.

The Hersey-Blanchard Model of the Situational Leadership Model

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 It is seen from the above Figure that the leadership style varies across the levels of followers’
maturity. A leader needs to use a telling style of leadership with immature followers who are not unable
and unwilling to take responsibility for completing their work. Once the followers mature to the second
level, the leader needs to exercise a selling style. Followers further matured i.e. able but unwilling, need
to be led by employing participating style by the leader. Finally, the most mature followers who are able
as well as willing require to be led by a delegating style of leadership for the simple reason because the
followers accept responsibility entrusted upon them.
What leadership style should be employed at which maturity level of followers is now tabulated
as follows:

Table Followers’ Maturity Level vis-à-vis Leadership Style.

Maturity Level Recommended Leadership Style
Telling (directive, low support)
1. Low ability, low willingness
Selling/coaching (directive, supportive)
2. Low ability, high willingness
Participating/Supporting
3. High ability, low willingness
(Supportive/low direction)
4. High ability, high willingness
Delegating (low direction, low support)

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 However, one key limitation of the situational leadership model is the absence of central
hypotheses that could be tested. It also does not have a widely accepted research base, which would
make it a more valid and reliable theory of leadership. Nonetheless, the theory has intuitive appeal and
is widely used for training and development in corporations. It has achieved considerable popularity and
also awakened many managers to the idea of situational approaches to leadership styles.
4.2.7.5.4. The Managerial Grid
One of the most widely known styles of leadership is the managerial grid developed by Blake
and Mouton. The grid is based on two underlying dimensions labeled as Concern for Production and
Concern for people. Based on these two dimensions, the authors have generated a 9 by 9 grid
representing concern for production along the horizontal dimension and concern for people along the
vertical dimension. The authors have identified the five distinct managerial styles as shown in the
following figure

A brief description of these five

leadership styles follows:
The impoverished
manager (1.I) has low concern for both production and people. He exerts the minimum efforts to get
essential work done, while maintaining organizational membership. This style of management is similar
to the laissez-faire style as discussed earlier.

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 The country-club manager (1.9) has high concern for people but low concern for production.
Good feelings towards followers are the hallmarks of such manager.
The authority-obedience manager (9.1) has more concern for production but low concern for
people. Production maximization is the hallmark of such manager. This style is similar to the autocratic
style of leadership.
The team-manager (9.9) has high concern for both production and people.
The organization man manager (5.5.) has moderate levels of concern for both production and
people. Such manager goes along to get along, conforming to and maintaining the status quo.
The best style for all managers, in all organizations, and under all situations is the (9.9) team
manager style.
4.2.7.5.5. Equity Theory
An important factor in motivation is whether individuals perceive the reward structure as being
fair. One way of addressing this issue is through equity theory, which refers to an individual’s subjective
judgements about the fairness of the reward she or he got, relative to the inputs (which include many
factors such as effort, experience, education, and so on), in comparison with the rewards of other.
J.Stacy Adams has received a great deal of credit for the formulation of the equity (or inequity) theory.
The essential aspects of the equity theory may be shown as follows.
Outcomes by a person Outcomes by another person
----------------------------- = ------------------------------------
Inputs by a person Inputs by another person

There should be a balance of the outcomes-inputs relationship for one person in comparison with
that for another person.
If people feel they are inequitably rewarded, they may be dissatisfied, reduce the quantity or
quality of output, or leave the organization. They also can ask for a greater reward. If people perceive
the rewards as equitable, they probably will continue at the same level of output. If people think the
rewards are greater than what is considered equitable, they may work harder. It is also possible that
some may discount the reward.
One of the problems is that people may overestimate their own contributions and the rewards
others receive. Employees may tolerate certain inequities for some time. But prolonged feelings of
inequity may result in strong reactions to an apparently minor occurrence. For example, an employee
being reprimanded for being a few minutes late may get angry and decide to quit the job, not so much
because of the reprimand but because of longstanding feelings that the rewards for his or her
contributions are inequitable in comparison with others’ rewards. Likewise a person may be very

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satisfied with a weekly salary of $500 until he or she finds out that another person doing similar work
gets $10 more.

4.2.7.5.6. Reinforcement Theory

Psychologist B.E. Skinner of Harvard developed an interesting-but controversial-technique for
motivation. The approach, called positive reinforcement or behaviour modification, holds that
individuals can be motivated by proper design of their work environment and praise for their
performance and that punishment for poor performance produces negative results.
Skinner and his followers do far more than praise good performance. They analyze the work
situation to determine what causes workers to act the way they do, and then they initiate changes to
eliminate troublesome areas and obstructions to performance. Specific goals are then set with workers’
participation and assistance, prompt and regular feedback of results is made available, and performance
improvements are rewarded with recognition and praise. Even when performance does not equal goals,
ways are found to help people and praise them for the good things they do. It has also been found highly
useful and motivating to give people full information on a company’s problems, especially those in
which they are involved.
This technique sounds almost too simple to work, and many behavioural scientists and managers are
skeptical about its effectiveness. However, a number of prominent companies have found the approach
beneficial. Emery Air Freight Corporation, for example, observed, that this approach saved the company
a substantial amount of money by merely inducing employees to take great pains to ensure that
containers were properly filled with small packages before shipment.
Perhaps the strength of the Skinner approach is that it is so closely akin to the requirements of good
managing. It emphasizes removal of obstructions to performance, careful planning and organizing,
control through feedback, and the expansion of communication.

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4.2.8. Communication
The word ‘communication’ is derived from the Latin word ‘Communis’ which means common.
If a person affects a communication, he has established a common ground of understanding.
“Communication in its simplest form is conveying of information from one
person to another”
- Hudson.
Stephen P Robbins views that communication refers to transference and understanding of
meaning. Thus, communication means transference of messages or exchange of ideas, facts, opinion or
feelings by two or more persons. It is the act of making one’s ideas and opinions known to others. Thus,
communication does not simply involve sending of a message one person. It also involves the receiver
listening to it, and responding to it or acting according to it.
4.2.8.1. Nature of Communication
1. Communication involves two parties, one who transmits and one who receives the message.
2. The two respective parties must have ability to convey and listen to what the sender to
communicate.
3. Communication includes sending the message and also receiving the response to the message.
4. The message may be conveyed verbally, in writing, by means of signs, gestures of symbols.
5. Communication is a continuous process. It pervades the entire organization.

4.2.8.2. Purpose of Communication

The purpose of communication in an enterprise is to effect change - to influence action toward the
welfare of the enterprise. Communication is needed to
 Establish and disseminate goals of an enterprise
 Develop plans for their achievement
 Organize human and other resources
 Select, develop and appraise members of the organization
 Lead, direct, motivate and create a climate in which people want to contribute and
 Control performance.
4.2.8.3. Process of Communication
The process of communication includes the following seven elements. (1) Communicator, (2) encoding
(3) Message (4) medium (5) decoding (6) receiver, and (7) feedback. These are shown in the following
figure.

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 ELEMENTS OF COMMUNICATION PROCESS

Communicator Encoding Message

Receiver Decoding Medium

Feedback

1. Communicator: The communication process begins with who has an intended message to
communicate. The characteristics of the communicator influence the communication process.
2.Encoding: It refers to converting a communication message into symbolic form. Encoding is
necessary because information can only be transmitted from communicator to receiver through the
symbols or gestures.
3. Message: The message is the actual physical product from the source of encoding. When we speak,
the speech is the message we write. When we gesture, the movements of our arms, the expressions on
our face are the message.
4. Medium: Medium is a channel through which a communication message travels. Medium is the link
that connects the communicator (sender) and the receiver. face-to-face verbal communication, use of
telephone, use of memorandum, notice, circulars, statements, etc. are the various means available as
media of communication. Besides, non-verbal media like signals, symbols, gestures, etc. may also be
used.
5. Decoding: Translating the sender’s message by the receiver is called decoding. Decoding is the
process by which the receiver draws meaning from the symbols encoded by the communicator or sender.
6. Receiver: The person who receives the message is called receiver. The communicator process is
incomplete without the existence of receiver of message.
7. Feedback: The actual response of the receiver to the message communicated to him is known as
“feedback”. In other words, if a communicator or sender decodes the message that he encodes, if the
message is put back into his system, we have feedback.

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4.2.8.4. Channels of Communication
The channel is the medium or path through which the message travels. The channels of
communication can be divided n the following three bases.
 Based on Relationship
 Based on Director of Flow, and
 Based on Method used.

I) Based on Relationship
a) Formal Communication
The channels of communications established formally by the management are called ‘formal
communication’. In other words, the formal channels of communication are used for the transmission of
official messages within or outside organization
b) Informal Communication
Communication, which takes place on the basis of informal or social relations among people in
an organization, is known as informal communication. Thus, informal communication can take place
between persons cutting across positions held by people working in different divisions and units.
Hence, it is also known as ‘Grapevine’
II) Based on Direction of Flow
1. Horizontal Communication
It refers to transmission of information among positions of the same level. This facilitates
coordination among peers or people working on same levels.
2. Upward Communication
When communication flows from lower-level employees to higher-level employees, it called
upward communication. Upward level communication encourages employees to participate in the
decision-making process and submit valuable ideas and suggestions.
3. Downward Communication
It refers to the flow of information from higher level to lower level employees. Such
communication may consist of verbal messages, conveying orders, policies, procedures, or written
matters conveyed through notices, circulars etc.
4. Diagonal Communication
Diagonal communication refers to flow of messages between persons who are in positions at
different levels of hierarchy and also in different departments. This type of communication takes place
under special circumstances.

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III) Based on Method used
1. Verbal Communication
When the message is conveyed orally, it is called verbal communication. It produces in
communication a personal touch. Verbal communication is the most economical both in terms of time
and money. However, its greatest drawback, if any, is its non-applicability especially when the
communicator and receiver are at places far away from one another and the number of persons to be
communicated is large.
2. Written Communication
Communication that takes place between people in written form is called written form. Formal
communication is usually in written form such as orders, instructions, reports, bulletins, etc.
Communication being in written form is permanent, tangible and verifiable. Limitations of written
communication are that it is time consuming, lacks personal touch and unfolds the secrecy about the
written message.
3. Gestural Communication
When the message is transmitted through some gestures, it is called gestural communication. People
use different gestures such as moving hands and eyes to communicate their views, ideas, etc. If the
superior pats his subordinate on his back, it is understood as appreciation for work.

4.2.8.5. Communication Networks

In organizations, communication flows among groups of individuals in different patterns. The
five most common communication networks are: Circle, wheel, Chain, Y Network and All channel
networks.

Ci r cle
wheel Y All channel

Chain
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Circle: It is the network where each members of the group can interact with the adjoining member. The
circle network is highly decentralized because each position can communicate directly with two other
positions in the network. No one can communicate directly with everyone.
Wheel: In case of wheel network, one person (a supervisor for example) can communicate with (say)
four workers, but the workers do not communicate with each other. The wheel relies on the leader to act
as the central control for all the group’s communication. Since, all communication passes through the
center position, the wheel is the most centralized communication network.
Chain: In this network, one person transmits information to another as per the chain in the
organizational hierarchy. For example, the president informs the vice-president who then passes on the
same information to the head of the department, who tells his/her manager, who passes on to the
supervisor, who then informs the employee.
Y Network: In this type of network, two people report to a superior or boss who occupies two positions
as shown in the figure.
All-Channel: The all-channel network permits all group members to actively communicate with each
other.
4.2.8.6. Barriers to Communication
Barriers to communication are factors that come in the way of effective communication, Some
Barriers to communication are filtering of the message, language, physical separation, status differences
and emotions.
Lack of Planning
Good communication seldom happens by change. Too often people start talking and writing
without first thinking, planning and stating the purpose of the message. Giving the reasons for a
directive, selecting the most appropriate channel and choosing proper timing can greatly improve
understanding and reduce resistance to change.
Filtering Barrier
In formal organizations, the message travels through many layers or levels of hierarchy. It is
found that the message tends to be distorted or impaired while passing through intermediate levels in
upward and downward communications. This is because the message is passed on to suit the
convenience or serve the interest of the ultimate receiver of the message.
Language Barrier
Language is a central element in communication. It may pose a barrier if its use obscures
meaning and distorts intent. The receivers of the message with their different educational and cultural
backgrounds find it hard to understand the message in the senders’ senses due to jargons used in the

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message language. The word may be attributed different meanings by the sender and the receiver of the
message. This is known as the problem of semantics.
Physical Separation Barrier
The physical separation of people in the work environment poses a barrier to communication.
Physical distance between the sender and the receiver of any message serves an obstacle to effective
communication. This is because the difficulty involved in evaluating whether the receiver has
understood, accepted, and acted upon the message sent to him when his workplace is far away from that
of the sender of the message.
Status Barrier
Status differences related to power and the organizational hierarchy pose another barrier to
communication among people at work, especially within manager-employee pairs. It is due to the status
difference that subordinates often suppress or withhold information which may not be liked by their
superiors, or pass on distorted information to please their superiors. On the other side, status
consciousness of the superiors prevents them from fully communicating information to their
subordinates.
Emotional Barrier
When people are eloquent with emotions, it influences their understanding of the message
accordingly. Psychological barriers do also impair effectiveness of communication. When the
subordinates hold favourable image of the superior, they become psychologically more inclined to
accept and respond positively to the message sent by the superior. Obviously, it does not happen so
when they have an unfavourable image of their superior. The image is built on the basis of experience
and interaction between the superior and the subordinate. Any change when its effects are uncertain also
creates psychological barriers to effective communication in an organization.
4.2.8.7. Suggestions for making communication effective
 Language: While preparing the communication message, its language should be relatively simple
and the ability of the receiver to interpret the message accurately should be kept in view. Efforts
should be made to explain abstract ideas and avoid vague expressions.
 Regulating Flow of Communication: Priority of messages to be communicated should be
determined so that the managers may concentrate on more important messages of high priority.
Similarly, the messages received should be edited and condensed, to the extent possible, to reduce
the chances of overlooking or ignoring important messages.

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 Feedback: Communication is complete when it receives feedback. Feedback may include the
receiver’s response in terms of acceptance and understanding of the message, his/her action, and the
result achieved. Thus, the two-way communication is considered to be more helpful in establishing
mutual understanding then one-way communication.
 Repetition: Repetition of message helps to improve effectiveness of communication. It helps the
listener interpret messages that are ambiguous, unclear, or too difficult to understand the first time
they heard. Repetition also helps to avoid the problem of forgetting.
 Restraint over Emotions: A strong feeling and emotions on the part of either the sender or receiver
of the message distort the meaning of the message, one may therefore, defers the communication for
some time.
 Mutual Trust and Faith: Communication become effective having mutual trust and faith between
the sender and receiver of the message. The honesty of the purpose is the best means breeding trust
and faith between two parties i.e. sender and receiver.
 Listening Carefully: A receiver-listener needs to be patient mentally well composed, and avoids
distractions while receiving the message. He/she should seek clarification, if necessary on the
message. At the same time, the sender of the message must also be prepared to listen to what the
receiver has to say, and respond to his questions, if any.

4.2.8.8. Electronic Media in Communication

Electronic equipment includes mainframe computers, minicomputers, personal computers,
electronic mail system, and electronic typewriters as well as cellular telephones for making telephone
calls from cars and beeper for keeping in contact with the office.
Telecommunication

Although telecommunication is just emerging a number of companies have already effectively

utilized the new technology in a variety of ways as shown by the following examples.

 A large bank supplies hardware and software to its customers so that they can easily transfer
funds to their suppliers.

 Several banks now make bank by phone services available even to individuals

 Facsimile main service ensures delivery of a document across the country within hours.

 The computerized airline reservation system facilitates making travel arrangements.

 Many firms have detailed personnel information – including performance appraisals and career
development plans - in a data bank.
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Teleconferencing

Teleconferencing involves a wide variety of systems, including audio systems, audio systems
with snapshots displayed on the video monitor, and live video systems. When a group of people
interacts with each other by means of audio and video media with moving or still pictures, the group is
said to be in ‘teleconference’
Full motion video is frequently used to hold meetings among managers. Not only do they hear
each other, buy they can also see each other’s expressions or discuss some visual display.
Advantages
Some of the potential advantage of teleconferencing includes savings in travel expenses and
travel time. There is no need to make travel plans long in advance. Because meetings can be held more
frequently, communication is improved between, for example headquarters and geographically scattered
divisions.
Disadvantages
Because of the case in arranging meetings in this manner, they may be held more often than
necessary. Teleconferencing is still considered as a poor substitute for meeting with other persons face-
to-face. Despite these limitations, an increased use of teleconferencing is likely in the future.

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 UNIT – V
CONTROLLING

5.1. Introduction
The managerial function of controlling is the measurement and correction of performance in
order to make sure that enterprise objectives and the plans desired to attain them are accomplished.
Planning and controlling are closely related. In fact, some writers on management think that these
functions cannot be separated. Planning and controlling may be viewed as the blades of a pair of
scissors; the scissors cannot work unless there are two blades. Without objectives and planes, control is
not possible, because performance has to be compared against some established criteria.

Controlling is the function of every manager from the president to supervisor. Some managers
particularly at lower levels forget that the primary responsibility for the exercise of control rests in every
manager charged with the execution of plans. Occasionally, because of the authority of upper level
managers and their resultant responsibility, top and upper level control is so emphasized that people
assume that little controlling is needed at lower levels. Although the scope of control varies among
managers, those at all levels have responsibility for the execution of plans and control is therefore an
essential managerial function at every level.
5.2. Definition
Control is checking current performance against predetermined standards
contained in the plans with a view to ensuring adequate progress and satisfactory
performance.
- E. F L Breach.
Controlling is the measurement and correction of performance in order to make sure
that enterprise objectives and the plans devised to attain them are accomplished.
- Harold Koontz

5.3. Nature/characteristics of control

1) Control process is universal
Control is essential function in any organization whether it is an industrial unit, university,
government office, hospital etc…

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2) Control is a continuous process
Control is a never-ending activity on the part of managers. It is a non-stop process. The manager
watches the operation of the management and to see whether they are going towards the desired end and
if not actions are not taken to correct them.
3) Control is action based
Action is essential element of the control. It is the action, which ensures performance according to
the decided standards.
4) Control is forward looking
Control is linked with future not past. A proper control system prevents losses, minimizes
wastages. It acts as a preventive measure.
5) Control is closely linked with planning
Plan gives the direction to various business activities while control verifies and measures the
performance of these activities and suggests proper measures to remove the deviations.
5.4. Need for Control
A control system is needed for three purposes:
 To Measure Progress.
 To Uncover deviation and
 To Indicate Corrective Action.

To Measure Progress
There is a close link between planning and controlling the organizations operations. The
planning process, the fundamental goals and objection of the organization and the methods for attaining
them should be established. The control process measures progress towards there goals. As Henry
Fayol clearly recognized decades ago. “In an undertaking, control consists in verifying whether
everything occurs in conformity with the plan adopted, the construction issued and principles
established.” As the navigator continually takes readings to ascertain where he is relative to a planned
course, so does the manager take readings to see where his enterprise or department is on the charted
and predetermined?
To Discover Deviations
Once a business organisation is set into motion towards its specific objectives, events occur that
tend to pull it “off target”. A successful control process is one that effect connections to the
organization before the deviations become serious. Major events, which tend to pull an organization
‘off target’ are as follows.

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Change: Change is an integral part of almost organisations environment. Markets shift, new products
emerge new materials are discovered and new regulation are passed. The control function enables
managers to detect changes that are affecting their organizations product as services. They can then
move to cope with the threats or opportunities that these changes represent.
Complaints: Today’s vast and complex organisations, with geographically separated plants and
decentralized operations make control a necessity. Diversified product lines need to be watched closely
to ensure that quality and profitability are being maintained. Sales in different retail outlets need to be
recorded accurately and analyzed, the organisations various markets. Foreign and domestic require
close monitoring.
Mistakes: Managers and their subordinates very often commit mistakes. For example, wrong parts are
ordered, wrong pricing decisions are made, problems are diagnosed incorrectly and so on. A control
system enables manages to catch the mistakes before they become serious.
Delegation: When manager delegate authority to subordinates, their responsibilities to their own
superiors is not reduced. They only was manager can determine if their subordinates are accomplishing
the tasks that have been delegated to them is by implementing a system of control. Without such a
system, manager will not be able to check on their subordinate’s progress, and so not be able to take
corrective action until often a failure has occurred.
To Indicate Corrective Action
Controls are needed to indicate corrective actions. They may reveal, for example, that plans
need to be redrawn or goals need to be modified or there is need for reassignment or clarification of
duties for additional staffing. When the corrective action indicated by the control system is
implemented, the loop in the system classes as in the operating principle of a thermostat as shown below

Input Process or operation Identification Output (Goal)

(man,money&material) towards Goals of Deviations

Feed back
programme of corrective _____Analysis of causes
action and its of Deviations
implementation

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5.5. Significance and limitations of control
5.5.1. Significance of control
i) Policy verification
Control helps to review, revise and update the plans. In this process organization and
management can verify the quality of various policies.
ii) Adjustments in operations
a control system acts as an adjustment in organizational operations. Control provides this clue
by finding out whether plans are being observed and suitable progress towards the objective is being
made to correct any deviations if necessary.
iii) Psychological pressure
Control process puts a psychological pressure on the individual for better performance. The
sound control system inspires employees to work hard and give better performance.
iv) Coordination
Control helps to emerge the coordination of the subordinates in the organization. Control
ensures coordination of the activities of different department through unity of direction.
v) Employee morale
Control creates an atmosphere of order and discipline in the organization. Control contributes
order and discipline in the organization.
vi) Efficiency and effectiveness
Proper control ensures organizational efficiency and effectiveness. The organization is effective
if it is able to achieve its objective. Since control focuses on the achievement or organizational
objectives. It necessarily leads to organizational effectiveness.
5.5.2. Limitations of control
 Control is expensive and time – consuming process.
 Control cannot consider the external factors such as technological changes, political
factors, social changes, government procedures etc…
 Human behaviour and employee morale also can not be measured.

5.6. Types of Control

There are three types of control viz. feed back or historical control, Concurrent control and feed
forward control.

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a) Feed back or historical control
It is known as post action control. It examines what has happened in the past. On the basis of this
feedback corrective action is taken. Feed back control is the process of adjusting future action on the
basis of information about past performance. For examples, disciplinary action, budgetary results and
quality inspections are some feed back controls. This control can be used to plan future with the aid of
past errors or success.
b) Concurrent control
It is as real time control. It provides measures for taking corrective action or doing adjustments
while the programme meets any obstacle. Organization control chart is an example of concurrent
control. For example riding a bicycle you must adjust yourself depending on the turns in the road and
keep your vehicle up right and move towards your aim.
c) Feed forward control
This control involves evaluation of inputs and taking corrective actions before a particular
operation is completed. It is preventive in nature. This control allows corrective action to be taken in
advance of the problem. For example cash budget in the organization is this type of control. The finance
manager prepares the next five-year flow of cash budget in the organization. It there is a shortage of
finance for particular month he is responsible to arrange for bank loan or other alternatives.

5.7. Essentials of Effective Control System

The essentials of an effective control system or the control process are as follows:
Suitable
The control system should be appropriate to the nature and needs of the activity. Controls used
in the sales department will be different from those used in finance and personnel. Similarly, a machine-
based method of production requires a control system, which is different from the system that is used in
labour intensive methods of production. Hence, every concern should evolve such a control system as
would serve its specific needs.
Timely and forward looking
The control system should be such as to enable the subordinates to inform their superior.
Expeditiously about the threatened deviation and failures. The feed back system should be as short and
quick as possible. This would help the manager to take immediate corrective action before the problem
occurs. A manager would surely prefer a forecast of what will probably happen next week as next
month – even though this contains a margin of error – to a report, accurate to several decimal points, of
the past about which he can do nothing.

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 That this is possible is illustrated by such forward-looking devices as cash control. Cash control
forecasts tells about cash needs well in advance and the manager is enabled to take corrective action
immediately.
Objective and comprehensible
The control system should be both; objective and understandable, objective controls specify the
expected results in clear and definite terms and leave little room for arguments by the employee. They
avoid red tape and provide employees with direct access to any additional information, which they may
need to perform their task. Employees are not made to go up and down the hierarchy to get the
information.
Flexible
The control system should flexible so that it can be adjusted to suit the needs of any change in
the environment.
Economical
Economy is another requirement of every control system. The benefit derived from a control
system should be more than the cost involved in implementing it. To spend a dollar to protect 99% is
not control. It is waste. Eighty years ago this was clearly understood by the men who built Sears,
Roebuck, the worlds biggest retail shop.
In the early days of the mail-order business the money in incoming orders was not counted. The
orders were weighted, unopened. (These were, of course, Roebuck had run enough tests to know what
average weights correspond to overall amounts of money and this was sufficient control.
Prescriptive and operation
A control system in order to be effective and adequate must not only detect deviations from the
standards but should also provide for solutions to the problems that cause deviations. In other words,
the system should be prescriptive and operational. It must disclose where failures are occurring. Who is
responsible for them and what should be done about them. It must focus more on action than
information.
Acceptable to organization member
The system should be acceptable to organisation member. When standards are set unilaterally by
upper level by upper level. Manager there is a danger that employees will regard those standards as
unreasonably or unrealistic. They may then refuse to meet them. Status differences between individuals
also have to be recognized. Individuals who have to report deviations to someone they perceive as a
lower level staff member may stop taking the control system seriously.

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Reveal Exceptions at Strategic Point
A Control system should be such as to reveal exceptions at strategic points. Small exceptions in
certain areas have greater significance than larger deviations in other areas. Five percent deviations from
the standard in office labour cost are more important than 20 percent deviations from the standards in
the cost of postage stamps. That we can quantify something is no reason for measuring it. The question
is “Is this what a managers attention should be focused on?”
Motivate People to High Performance
A control system is most effective when it motivates people to high performance. Since most
people respond to a challenge, successful meeting a tough standard may well provide a greater sense of
accomplishment than meeting an easy standard. However, if a target is so tough that it seems impossible
to meet, it will be more likely to discourage than to motivate effort. Standards that are too difficult may,
therefore, cause the performance of organization members to decline.
Should Not Lead to Less Attention to Other Aspects
Control over one phase of operations should not lead to less attention to other aspects. For
example, if control put pressure on employees to increase output, the quality of work, care of equipment
and prevention of waste should not be neglected.

5.8. Control Process.

The controlling process involves three steps:
1. Establishing Standards.
2. Measuring performance against these standards and
3. Correcting variations from standards and plans.

a) Establishing Standards
Plans are the yardsticks against which managers desire controls, the first step in the control
process logically would be to establish plans. The step in the control process is to establish standards
against which results can be measured. Since entire operations cannot be observed, each organization
must first develop its own list of key results areas for the purpose of control. Some key areas in all
business organization are
1. Profitability
2. Market Position
3. Productivity
4. Personnel Development

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 5. Employee Attitude and
6. Public Responsibility
The standards the managers desire to obtain in each key area should be defined as for as possible in
quantitative terms. Standards expressed in vague or general terms such as “ Costs should be reduced” or
“ orders should be executed quickly” are not as specific as “ Overheads must be reduced by 12 %” or “
all orders must be executed within three working days”.
Even standards in areas such as public relations while hard to express in quantitative terms, can be
defined more accurately by adding more specific details, about the number and type of customer
complaints.
Standards need to be flexible in order to adapt changing conditions. For instance, a new salesman
who proves to be an above average performer should have his sales standards adjusted accordingly.
Similarly, expected delivery times need to be adjusted if the local highway is being repaired.

Every objective, every goal of the many planning programmes, every policy, every procedure and
every budget becomes a standard against which actual performance might be measured. In practice,
however, standards trend to be of the following types.
1. Physical Standards: Such as labour hours per unit of out put, units of production per machine
hour and so on.
2. Cost Standards: Such as direct and indirect cost per unit produced, material cost per unit, selling
cost per unit of sale etc.
3. Revenue Standards: Such as average sale per customer, sales per capita in a given market area
etc.
4. Capital standards: Such as the rate of return on capital invested, ratio of current assets to current
liabilities etc.
5. Intangible Standards: such as competence of managers and employees, success of a public
relation programme etc.
Generally speaking, the standards should emphasize the achievements of results more than the
conformity to rules and methods. If they do not do so, then people will start giving more importance to
rules and methods than to the final results. ‘Doing the right things’ will give place to ‘doing thing right’.
This would displace organizational goals.

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b) Measurement of performance
It is the second step in the control process. While measuring the performance of standard, the
following questions should be kept in mind: a) what and how to measure? b) Why to measure? and c)
How to check the performance?
Measurement of performance is an easy task when the standards and methods of measuring
performance are clear. Peter Drucker pointed out that it is very much desirable to have clear and
common measurements in all key areas of business. For example, the performance which is quantitative,
can easily be measured in terms of production units, sales units, gross profit, whereas the qualitative
performance such as morale, human relations, job satisfaction, etc… cannot easily be measured because
of lack of standards. Some techniques are used to measure standards, such as personal observation,
sampling, surprise visit, managerial accounting tools and so on.
While measuring performance, comparison of the actual and standard performance should be
made in order to find out the deviations and the causes of such deviations. This enables better control
and ensures better performance.
c) Correcting the Deviations
After comparing the actual performance with the prescribed standards and finding the deviations,
the next step that should be taken by the manager is to correct these deviations. Corrective action should
be taken without easting of time so that the normal position can be restored quickly. The manager should
also determine the correct causes for deviation. The causes for deviation may be of different types, such
as inadequate and poor equipment and machinery, inadequate communication system, lack of motivation
of subordinates, defective system of training and selection of personnel, defective system of
remuneration etc… The remedial action that should be taken depends on the nature of causes for
variation.

5.9. Control Techniques

A variety of tools and techniques has been used over the years to help managers control the
activities in their organizations. We may classify these techniques into Old and New.

5.9.1. Old Control Techniques

Old control techniques are those, which have long been used by managers. Important techniques
under this category are budgeting, cost accounting, Break – even analysis, financial statements and ratio
analysis, auditing, reports, rules and personal observations. All these techniques are described below:

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5.9.1.1. Budgeting
A budget is a statement of anticipated results during a designated time period expressed in
financial and non – financial terms. There are three essential steps in the control process include
establishing standards comparing results with standards and taking corrective action. In terms of these
steps, the preparation of budget is, in effect, the step of establishing standards. In terms of the five types
of standards such as physical, cost, revenue, capital and intangible, the budgeting process typically
involves the use of cost standards.

The budgeting process begins when top management sets the strategies and goals for the
organization. Usually, lower level managers will then devise budgets for their sub – units within these
guidelines set by the top management. The supervisors of those managers will then review the budgets;
the supervisors will eventually integrate lower level budgets into their own budget and sent it up the
chain of command for review. This process continues until the organizations overall budget has been
approved by the board of directors. A budget department committee may assist line managers in budget
preparation and review.

5.9.1.1.1. Types of Budgets

On the basis of the purpose for which budgets are prepared, they may be classified as follows:
1. Sales Budget: It is a comprehensive sale programme and plan for developing sales. It lays down the
sales potential in terms of quantity, value, period, product etc. Sales forecasting is the basis for preparing
this budget. The factors to be considered for preparing sales budget are population trend, consumer’s
purchasing power, price trend of the product, nature of competition, past sales, extent of advertising etc.

2. Selling and Distribution Cost Budget: This budget lays down the cost of selling and distribution of
the product during the budget period. It includes advertising cost, research and development cost,
transport cost etc. The sales manager, advertising manager and the distribution manager jointly prepare
this budget

3. Production Budget: This budget is based on the sales budget. It lays down the quantity of units to be
produced during the budget period. The main purpose of their budget is to maintain an optimum balance
sales, production and inventory position of the firm.

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4. Production Cost Budget: This budget is based on the production budget. It lays down the estimated
cost of carrying out production plans.
Further the production cost budget is sub divided into various sub – budgets like raw materials budget,
labour budget, production over head budget etc.
5. Capital Expenditure Budget: This budget outlines specifically capital expenditures for plant,
machinery, equipment, inventories and other items. It also points out the plans concerning investments,
expansion, growth, improvements, replacements etc.
6. Cash Budget: This budget gives the anticipated receipts and disbursements for the budget period and
shows the cash position arising from it. It indicates the requirement of cash at various points of time and
helps the management in planning and arranging cash to meet the needs of the business concern. Thus, it
ensures that the concern never has any shortage of cash required. Cash budget helps the management in
controlling and coordinating the activities, which involve receipt and payment of cash.
7. Master Budget: A Master budget gives a summary of all the functional budgets and shows how they
affect the business as a whole. In other words, it is complied from various subsidiary or functional
budget. It provides detailed particulars regarding production, sales, cash, fixed assets etc. The need for a
master budget containing a summary of all the subsidiary budgets arise because business concerns are
too large to permit the detailed planning of all the aspects of the business in one budget.
5.9.1.1.2. Advantages of Budgetary Control
1.The different functional budget clearly indicates the limits for expense and also the results to be
achieved limits for expense and also the results to be achieved in a given period. This keeps everybody
in the enterprise alert and encourages the optimum use of its resource.

2.Budgets make it possible to co-ordinate the work of the entire organisation. In devising budgets,
managers take into account information provided by the sub-units of their organisation, which leads to
define and integrate the activities of all the members.

3.Since budgets are generally prepared with the consultation of managers at different levels, they
provide to the enterprise the fruit of combined wisdom. Lower level managers are motivated in
accepting and meeting budgets that they have had a hand in shaping.

4.The budgetary control brings together the activities of various departments in an overall perspective
and this promotes cooperation and team spirit among the employees.

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5.Through budgetary control, the deviations from predetermined standards are found out and the
management is enabled to take suitable corrective action immediately. This minimizes wastage and
losses.

6.The budget system helps people learn from past experience. Once the budget period is over, managers
can analyze what occurred, isolate errors and their laws, and take steps to avoid those errors in the next
budget period.

7.Budgets improve communication. A plan cannot be put into effect unless it is communicated to those
who must carry it out. In the process of developing the budget with those responsible for its
implementation, managers can communicate their own objectives and plans must effectively.
5.9.1.1.3. Limitations of Budgetary Control
1.Since budgets are used to evaluate results, inefficient employees do not whole heartedly co-operate
with the system.
2.Budget estimates sometimes proves to be grossly inaccurate. This renders the budgetary control
system totally ineffective.
3.Budgets are mostly inflexible and rigid and do not respond to internal or external environmental
changes. The standards once fixed are allowed to continue for several years.
4.Budgets are of little help in handling the here-and-now problems that supervisions have. They are
useful only in analyzing the past and charting the future.
5.A budgetary control programme may sometimes become very cumbersome and unduly expensive.
6.A good manager is discouraged from taking initiative and undertaking activities for which provision
has not been made in the budget, even though they are useful for the enterprise. On the other hand, a
bad manager can hide his inefficiency behind the budget. This is because the budgets have a way of
growing from proceeded. An amount once spent becomes a floor for future budgets. Manager asks
much more than they need.
5.9.1.1.4. Zero Base Budgeting
ZBB is defined as "a planning and budgeting process which require each manager to justify his
entire budget request in detail from scratch (hence Zero Base) and shifts the burden of proof to each
manager, to justify why he should spend money at all. The approach requires that all activities be
analysed in decision 'packages' which are evaluated by systematic analysis and ranked in the order of
importance".
- Peter. A. Phyrr.

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5.9.1.2. Standard Costing
The cost of production determines the profit earned by an enterprise. In view of this fact, the modern
management has given much importance to cost accounting and cost control. Standard costing is one of
the techniques used by modern business concern for the purpose of cost reduction and cost control. The
objective of standard costing is the same as that of budgetary control. The system involves a comparison
of the actual with the standards and the discrepancy is called variance. The various steps involved in
standard costing are as follows:
1. Setting of cost standards for various components of cost such as raw materials,
labours and overheads. The standards fix the limit within which the different types of expenses
must be kept.
2. Measurement of actual performance.
3. Comparison of actual cost with the standard cost laid down.
4. Finding the variance of actual cost from the standard cost.
5. Finding the cause of variance.
6. Taking necessary action to prevent the occurrence of variance in future.

5.9.1.3. Financial Statements and Ratio analysis

The Trading Profit and Loss Account the balance sheet of a company are the usual financial
statements which are prepared ex post (in retrospect) to indicate what financial events occurred since the
last statements. Depending on the company, the period covered by a financial statement could be the
previous year, the previous quarter, or the previous month.
The usefulness of these statements for applying control measures is limited by the fact that they
cover only post events. However, they can provide managers with useful information about trends.
Managers can also use these statements to compare their organizations with other organization and can
thus evaluate their own performance. In addition, they are used by people outside the organization to
evaluate the organizations strength’s, weakness and potential.
Ratio Analysis seeks to extract information from a financial statement in a way that will allow an
organization’s financial performance or condition to be evaluated. It involves selecting two significant
figures from a financial statement and expressing their relationship in terms of a percentage or ratio.

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 The Ratios most commonly used by organizations are as follows:
1. Liquidity Ratio: They measure the company’s ability to pay back short – term debts by
converting assets quickly into cash. In other words, they are a measure of a company’s liquidity.
One such ratio is the current ratio. It is expressed by the fraction: current assets + current
liabilities.
2. Debt Ratio: While liquidity ratios are used to measure a company’s short - term financial
position, debt ratios are computed to assess its ability to meet long – term commitments. The
simplest debt ratio is total debt divided by total assets. This ratio tells us what proportion of the
company’s assets is owned by its creditors.
3. Profitability Ratio: These ratios express as percentage of sales or of total depict the company’s
efficiency of operation. A profit of Rs.4 lakhs, for example is unimpressive if it is derived from a
total sales of Rs.40 crores or a capital investment of Rs.100 crores.
4. Operating Ratio: These ratios measure how efficiently the manufacturing and sales are being
carried out. Some of the more common operating ratios are the inventory turnover ratio and the
total assets turnover ratio. The inventory turnover ratio is defined as sales + inventory. It
suggests that how the assets are being used efficiently by the firm.

The total assets turnover ratio is expressed as sales / total assets. This ratio gives an indication of
how effectively the firm’s assets are being used.
These ratio analysis comparisons can be made in one of two ways by comparisons over a time
period. The present ratio compared with the same organization’s ratio in the past: and comparison with
other similar organization’s or with the industry as a whole. The first type of comparison will indicate
how the organization performance or condition has changed: the second type will suggest how well the
organization is doing relative to its competitors.
5.9.1.4. Return on Investment
One particular approach to financial control that has received considerable attention in recent
years is the return on investment ratio (ROI), also known as the Du Pont systems of financial analysis. It
is expressed by the following formula:

ROI= Sales/Investment (Fixed and working capital) * profit/sales

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 This ratio is computed on the basis of capital turnover (sales/investment) multiplied by earnings
as a proportion of sales (profit/sales). This calculation recognizes that one division, with a high capital
turnover and a lower percentage of earnings to sales, may be more profitable in terms of return of
investment than another with a high percentage of profits to sales but with low capital turnover.

5.9.1.5. Break – Even analysis

Break – Even analysis is another control device used in business firms. It involves of a chart to
depict the overall volume of sales necessary to cover costs. It is point which the cost and revenue of the
enterprise are exactly equal. In other words, it is that point where the enterprise neither earns a profit nor
incurs a loss.
Break – even analysis can be used both as an aid in decision – making and as a control device. The
specific areas where break – even analysis can help in decision – making include.
1. Identifying the minimum sales volume necessary to prevent loss.
2. Identifying the minimum sales volume to meet established profit objectives.
3. Providing information helpful in making decision on the effect of raising or lowering prices, and
4. Providing data helpful in decisions to drop or add product lines.

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 As an aid to control, break – even analysis provides one more yardstick by which to evaluate
company’s performance at the end of a sales period.
The break-even point can be calculated with the following formula
Break — even point = Fixed costs
Price — Variable Cost

Break — even point = Price - Variable costs per unit

5.9.1.6. Internal Audit and External Audit

Internal audit is another control techniques used by modern management. Internal audit is
conducted by an internal auditor who is an employee of the organization. He makes an independent
appraisal of financial and other operations. In addition, he appraises company’s policies, plans and
management performance. He pinpoints defects in the policies or plans and gives suggestions for
eliminating the defects. As internal audit is conducted regularly, it keeps the employees always alert.
External audit is an independent appraisal of the organization financial accounts and statements.
The purpose of external audit is to ensure that the interests of shareholders and other outside parties
connected with the company are safeguard against the malpractices of the management. The external
auditors is a qualified person and he has to certify the annual profit and loss account and balance sheet
carefully examination of the relevant books of accounts and documents. In case the external auditor is
negligent in performing his duties or becomes party to any fraud or error committed by the management,
he will be liable under both civil and criminal laws.
5.9.1.7. Reports
A major part of control consists of preparing reports to provide information to the management
for purpose of control and planning. The following are certain types of reports which are prepared and
submitted to the management regularly:
1. Top Management
i. Profit and loss statement.
ii. Balance sheet.
iii. Position of stock.
iv. Cash – Flow Statement.
v. Position of working Capital.
vi. Capital expenditure and forward commitments together with progress of projects in hand.
vii. Sales, Production and Other appropriate statistics.

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2. Sales Management
i. Actual sales compared with budgeted sales to measure performance by:
a. Products
b. Territories
c. Individual salesman.
d. Customers.
ii. Standard Profit and Loss by a Product:
i. For fixing selling prices and
ii. To concentrate sales on most profitable products.
iii. Selling expenses in relation to budget and sales value analyzed by
a. Products
b. Territories
c. Individual salesman.
d. Customers.
iv. Bad debts and accounts, which are slow and difficult in collections.
v. Status reports on new or doubtful customers.
3. Production Management
i) To Buyer:
 Price variations on purchase analyzed by commodities.
ii) To Foreman:
 Operational efficiency for individual operators, duly summarized as department averages.
 Labour utilization report and causes of lost time and controllable time.
 Indirect shop expenses against the standard allowed
 Scrap report.

iii) To Works Manager:

 Department operating statement.
 General works operating statement (expenses relating to all works not directly allocable or
controllable by departments).
 Plant utilization report.
 Department scrap report.

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  Material usage report.
4.Special Reports
These reports may be prepared at the request of the management accountant or the manager. The
necessity for them may arise on account of the need for a more detailed information on matters of
interest first revealed by the routine reports. Some of the matters in respect of which such reports may be
prepared are:
a. Taxation, legislation and its effect on profit.
b. Estimation about the earnings capacity of a new project.
c. Break – Even analysis.
d. Replacement of capital equipment.
e. Special pricing analysis.
f. Make or buy decision.
Some important considerations in drawing up these reports are as follows:
a) Information Quality
The more accurate the information, the higher its quality and the more securely managers can
rely on it when deciding what action to take. However, the cost of obtaining information increases as the
quality of the information desired goes up. How accurate the information needs to be will vary with the
situation. But in general, information of higher quality that does not add materially to a managers
decision – making capability is not worth the added cost.
b) Information Timeless
The information provided by a report must suggest action in time for that to be taken. Just when
information is considered timely, however, will depend on situation. For example reports destined far
top – level managers to monitor progress on long-range objectives may be considered timely if they
aware at quarterly intervals. The cost of making them available weekly would not be justified, since
long-range plans are neither reviewed not modified at such frequent intervals. However, middle and
lover level managers responsible for emerging operations and activities may need a weekly at even daily
report on machine downtime if delays are to be minimized. The quality control managers must get a
daily a weekly report on all customer rejections. On a monthly as quarterly basis, such information
would merely be ancient history and would be of no value to the manager.
Timeliness may also be determined by company policy on by events, rather than by the calendar.
Information on inventory, for example, is provided to the manager responsible for regarding only where
a previously established minimum level for the inventory is being approached. Requiring inventory
information on a calendar basis-such as away week. When inventory levels far mast items are well a

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bore their record point would usually not be worth the added cast, since action would not be implied by
the information.
c) Information Quantity and Relevance
A report that provides too little information cash be ineffective, because it may lead managers to
make wrong at late decisions that worsen problems instead of solving them conversely a report that
provides managers too much information can also provide ineffective because that may not isolate what
they need from a flood of irrelevant facts and figures. A good report should fill as evaluate information
so that only the most relevant information is supplied to the appropriate manager. In addition, a good
report should condense information, so that what is relevant may be absorbed in a short period of time.
5.9.1.8. Standing Orders, Rules, Limitations
Standing orders, rules and limitations are also control techniques used by the management. The
manager, who authorized his subordinate to make curtain decisions as delegates some of his powers,
lays down the limits far them. Limits may be decided on the basis of the nature of work and status of the
subordinate. The management issues standing orders and they are to be observed by the subordinates.
They may be concerned with the rules, regulations, discipline, procedures, conditions, timings etc.
5.9.1.9. Personnel Observation
A manager can also exercise fruitful control over his subordinates by observing them while they
are engaged in work. Personnel observations help the manager not only in knowing the worker’s attitude
towards but also in correcting their work and methods, if necessary. More over, when the worker knows
that his superior is observing him, he will be alert and will not waste his time. But in some cases he may
also unset being observed and may develop resistance. In any case, their method is very costly and
cannot work in large concern any degree of accuracy.
5.9.2 New Control Techniques:
These techniques which are of recent origin also not markedly overlap the traditional control
devices, but provide the kind of information not readily available with the traditional methods.
Therefore, when these control techniques are used, it is usually in addition to the control devices
described in the preceding section.
5.9.2.1. PERT and CPM
The two major techniques under this heading are PERT (Programme Evaluation and Review
Technique) and CPM (Critical Path Method). Both Techniques were developed independently, although
virtually at the same time, around 1957-58. PERT was first developed for the US navy in connection
with the Polaris weapon system and is credited with reducing the completion time of the programme by

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two years. CPM was developed jointly by Du Pont and Remington Rand of USA in order to facilitate
the control of large, complex industrial projects.
Both PERT and CPM are primarily oriented towards achieving better managerial control of time
spent in completing a project. Under both the techniques, a project is decomposed into activities and
then all activities are integrated in a highly logical sequence to find the shortest time required to
complete to entire project. The main difference between PERT and CPM lies in the treatment of time
estimates. PERT was created primarily to handle research and development projects in which time spans
are hard to estimate with any degree of accuracy, consequently, PERT time span are based on
probabilistic estimates. CPM, on the other hand, is usually concerned with projects that the organisation
has had some previous experience with time estimates, therefore, can be made relatively accurately.
The use of both PERT and CPM has spread rapidly today in controlling time-critical projects
such as reinforcing a weak class, constructing a building at an olympic site as completing contracts that
include penalty payment clauses. Many companies, make use of three techniques for working out the
cast estimates of a project also.
5.9.2.1.1. Steps involved in developing the Network
Both under PERT and CPM, the purpose is to divide the project into a number of operations and
then to draw a picture of the order in which and of the time when these operations should be started and
completed. This picture is known as the project graph or arrow diagram. The following steps are
involved in drawing this diagram.
1.The first step is to break down the whole project into a number of clearly identifiable activities and
event. An activity is the actual performance of a task. The preceding event is called the ‘tail event’ and
the following is called ‘head event’.
2.Once the list of various activities is ready, we have to examine each activity in relation to the other
activity.
3.The next step is to draw the diagram portraying the precedence, concurrence and subsequence of all
activities and events. On this diagram, arrows show all activities and circles show all events. In CPM
diagrams, a single time estimate is written against each activity. In PERT, each activity is assigned three
time estimates.
i. Optimistic – Shortest time the activity takes place.
ii. Most likely- Time is estimated under practical situations, in which certain things go wrong
and some go as per plan.
iii.Pessimistic – Longest time the activity takes place.

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 Generally the three estimates for each activity are combined into a weighted average, called
expected activity time.
4.Finally, the critical path is determined. The critical path is the longest path through the network in
terms of amount of time the entire project will take. It indicates a series of activities which must be done
in sequence and which will take longer than the other sequence of jobs that can go along simultaneously.
It is critical because the time spent on the activities that lies along this path must be shortened if the total
time of project is to be shortened.

5.9.2.1.2. Uses of PERT and CPM

1It ensures actual planning.
2.It makes every manager fully aware of his responsibility.
3.It ensures improved management of resources.
4.It facilitates future – oriented control.
5.It facilitates improved decision-making.
6.It ensures simultaneous performance of different parts of work.

5.9.2.1.3. Limitations of PERT and CPM

1.They are suitable mainly in cases where time is the essence of performance or where cost and time are
so related that by controlling time, cost is controlled.
2.Estimate of time, cost and events are seldom available with the precision required for effective control
through PERT. Errors in estimate of the numerous inter locking points of the chart may add up to a
situation to make the PERT chart erratic and unreliable as a control technique.
3.PERT has a limited application to one time non- repetitive projects. It does not help control in
continuous processing and production.

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